Updated on March 11th, 2019 by Josh Arnold
The demographics of the United States are currently undergoing a seismic shift as the Baby Boomer age, and the average 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 almost 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 materially.
We believe LTC is an attractive investment for income investors. The stock has an above-average dividend yield (5.3%) and pays these dividends monthly. There are currently fewer than 40 monthly dividend stocks, which you can access below:
While LTC Properties is poised to benefit from an 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.
Business Overview
LTC Properties is a healthcare REIT that owns and operates skilled nursing facilities, assisted living facilities, and other healthcare properties.
LTC was incorporated in 1992 and has grown to own nearly 200 properties across the United States. LTC has a market capitalization of $1.7 billion, making it much smaller than other healthcare REITs like Omega Healthcare Investors (OHI), HCP, Inc. (HCP), or Welltower (WELL).
More details about LTC Properties’ business model and recent financial performance can be seen below.
Source: LTC Properties Investor Presentation, slide 3
The trust’s yield, after a recent bout of weakness in the stock, is in excess of 5%. The monthly dividend stands at $0.19, where it has been since late 2016.
LTC’s property portfolio is divided into two main groups: skilled nursing properties and assisted living properties.
LTC Properties owns 93 skilled nursing properties that account for 49% of the market value of its portfolio and 58% of its revenues.
The trust also owns 103 assisted living properties that are 48% of the market value of its portfolio and 41% of its total portfolio revenue. The balance of the portfolio is in other properties that are under development.
Source: LTC Properties Investor Presentation, slide 12
Further, the vast majority of LTC’s portfolio is in real properties, while about 15% of it is in loans receivable. LTC has actually slightly shrunk its total portfolio in recent years as it has acquired and divested properties at roughly equivalent rates.
Management has been careful not to overextend itself with new development, which has kept a lid on growth rates.
Growth Prospects
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.
Recent years haven’t seen the portfolio grow, but that is an option for LTC, particularly given its conservative financing position.
Source: LTC Properties Investor Presentation, slide 19
The trust has $600 million available liquidity, but has used just over $100 million of it. That not only means the trust has the financial capacity to expand as it pleases, but it also means its leverage and coverage ratios are outstanding.
The trust has only 38% of its gross assets encumbered by debt. Its interest coverage ratios are quite strong for a REIT as well, a sector that tends to operate on the higher end of the leverage spectrum.
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 $1.4 billion to work in new real estate investments.
Source: LTC Properties Investor Presentation, slide 4
For context, LTC currently has a market capitalization of $1.7 billion – so this $1.4 billion of capital deployed over the past eight years is significant relative to the size of the company.
LTC’s investment rate is lumpy by nature, with some years seeing an enormous amount of investment, but others seeing almost none.
As the domestic population continues to age, LTC’s past investments should continue to pay dividends for years to come.
Source: LTC Properties Investor Presentation, slide 24
This slide shows the immense amount of growth LTC’s target population will experience in the coming years.
The annual growth rate of the 75+ population will be roughly four times that of the general population, providing a strong, long-term tailwind for those that operate facilities to serve that segment of the population.
Indeed, this is a well-publicized, but very valuable tailwind for LTC.
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 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 29 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.
To this end, just over half of LTC’s revenue is paid by private payers, with the rest coming from a government source. This should help it hold up well during a recession from a receivables perspective and most of its revenue should be protected.
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.
The trust’s FFO in 2018 was essentially flat to 2017, coming in at $3.06 per share against $3.10 per share. Indeed, LTC has had a difficult time growing in recent years as it has seen its portfolio gradually shrink in size.
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 5.3% on the trust’s current unit price of $43.
Although LTC Properties has traded with a higher dividend yield in the past, the stock’s current dividend yield is slightly higher than it has been recent years.
Thus, it is unlikely that valuation changes will have a meaningful effect on the future total returns of LTC Properties.
The trust’s growth rate is likely to be fairly low in the coming years barring a shift in its investment strategy and begins to expand its portfolio again.
We believe investors can expect LTC Properties to boost its funds from operations per share at a low-single digit rate per year (on average) over full economic cycles.
Given this, combined with the current yield and essentially no impact from the valuation, we expect total annual returns to approach 10% for holders of LTC.
Final Thoughts
LTC has many of the characteristics of a solid dividend investment.
The company has a strong 5.3% 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 looking for exposure to the healthcare REIT space.
