Healthcare real estate investment trusts (REITs) are all, basically, preparing for the same thing: The aging of the baby boom generation. LTC Properties (NYSE:LTC) is no different in that regard, but it provides something that not too many stocks do today -- monthly dividends. Add in a roughly 5% dividend yield, and investors looking to replace a paycheck will find the name fairly interesting already. But is it a great dividend stock? That's a much harder question to answer.
A look at the core
LTC has a market cap of roughly $1.7 billion and owns around 200 properties (basically fully occupied). That makes it a small fry when you compare it to the giants of the industry, like Welltower (NYSE:WELL) and Ventas (NYSE:VTR), which have market caps of $32 billion (1,300 properties) and $21 billion (1,100 facilities), respectively. It isn't nearly as diversified as this pair, either, with fewer properties and a focus on just two healthcare niches, long-term care (nursing homes), and assisted living facilities. These are key senior housing sectors.
Senior housing has been a notable issue lately for healthcare REITs. The independent living niche, which provides less care than nursing homes and assisted living facilities, has seen material construction, and there's a supply/demand imbalance that's put pressure on occupancy levels and rents. This has been a problem for some healthcare REITs, because they actually manage some of the assets they own. This is known as a senior housing operated portfolio (SHOP) in the industry. In reality, a REIT hires third parties to run the facilities, with operating results, good or bad, flowing through the REIT. This has been an overhang on a number of players in the sector, notably including Ventas. LTC doesn't play in this space.
It leases out its properties using a net lease structure, which means that its lessees are responsible for most of the costs of the properties they occupy. Its facilities also provide more care to residents. However, that doesn't mean that everything has been going well, with LTC having to deal with the bankruptcy of a key customer over the last two years. To be fair, there are always select lessees that have issues and, at this point, LTC appears close to resolving the situation. Notably, it has achieved this without cutting the dividend (more on the dividend below).
About half of the REIT's rents come from assisted living properties. The other half of the portfolio is made up largely of nursing homes and other long-term care assets. The long-term concern as you move up to these higher levels of care assets is that third-party payers become an increasingly important issue. For example, only about a third of residents pay their own way at LTC's nursing homes, with the rest of the rent there covered by Medicare and Medicaid reimbursements. There's additional risk in this because those two government-run programs can, and do, change their terms. So operators can get hit if costs go up, but Medicare and Medicaid payments don't increase enough to offset increasing expenses. That, in turn, can lead to financially stressed tenants for LTC and other healthcare REITs. This isn't a knock against LTC, per se, since the issue affects any REIT that owns higher-level care facilities. It is something that will always need to be top of mind here.
LTC also makes loans and has development properties. These are smaller pieces of the business. However, the development side is interesting in that ground-up construction can lead to higher returns on investment. It also allows LTC to upgrade its portfolio with new assets while selling off older ones (it has a long history of pruning assets).
Is it worth owning?
LTC's 5% dividend yield is a bit higher than Welltower's 4.5% (Welltower's SHOP assets have avoided the problems its peers have faced) and lower than Ventas' 5.5%. Like these two names, LTC's dividend has trended higher over time but hasn't done so consistently. For example, LTC hasn't increased its dividend since October 2016. A portion of that relates back to the above-noted tenant troubles. So dividend growth isn't a huge draw here. If that's what you are looking for, then other REITs would be better choices. Note that Welltower hasn't increased its quarterly dividend since the start of 2017, and Ventas, while working on a nine-year streak of annual increases, didn't increase its dividend as usual in the fourth quarter of 2019, potentially putting the streak at risk in 2020.
So investors researching LTC should basically be looking at its ability to keep paying. On that score, the metrics are pretty good. For example, its funds from operations (FFO) (like earnings for an industrial company) payout ratio is around 75% to 80%. That's very reasonable for the types of leases it signs and in light of the tenant bankruptcy with which it has been dealing. Ventas, by comparison, could see its payout ratio inch close to 90% (or higher) because of the weakness in its SHOP portfolio. Welltower's payout ratio is in the low 80% range. So the dividend at LTC looks pretty secure. And while this isn't a growth story, LTC has increased its top line consistently over time. So more increases are likely in the future; they'll just come intermittently and won't likely appear until the bankruptcy situation is fully behind the REIT.
Another piece of the dividend puzzle, however, is a REIT's financial foundation. On this score, LTC's balance sheet looks pretty solid. Its financial debt-to-equity ratio has been increasing over time as it has expanded but remains at around 0.35 times. That's in line with Welltower, which is considered one of the best-run healthcare REITs. It is lower than the nearly 0.45 times that Ventas is operating with. LTC also has around 90% of a $600 million line of credit available to it, should it need quick access to cash. So, financially speaking, LTC stacks up pretty well.
Is LTC a great dividend stock?
From a fundamental perspective, LTC looks attractive relative to some of the big names in the healthcare REIT space. What it lacks in diversification and size, it makes up for in financial strength. That said, the current price-to-FFO ratio is around 15 compared to nearly 20 for Welltower. Ventas, dealing with some notable troubles in its SHOP portfolio, has a price-to-FFO ratio of around 15. So, if you are looking for a consistent dividend paid monthly from a healthcare REIT with a solid portfolio, LTC also looks like it's a decent deal today. And the yield, at more than twice what you'd get from an S&P 500 Index fund, is generous.
However, it is hard to call LTC a great dividend stock because of the lack of consistent dividend growth. It is impressive that LTC has been able to maintain its dividend while dealing with a troubled tenant. So this isn't really meant to be a knock. It is simply that achieving greatness is hard. While it's fair to say LTC does manage to earn a solid "good" dividend stock call, it just doesn't have what it takes to be called great.