Shares of healthcare-focused real estate investment trust (REIT) LTC Properties (NYSE:LTC) rose about 15% in April, according to data from S&P Global Market Intelligence. The average REIT was up around 9%, using Vanguard Real Estate ETF as a proxy, and the S&P 500 index was up 13%. But don't read too much into that gain; through the first four months of the year. LTC was still down roughly 31%, which was worse than the average REIT and the S&P 500.
Assisted living and skilled nursing facilities make up roughly 85% of LTC Properties' portfolio (accounting for about 81% of revenue). The rest is made up of loans to nursing homes. In other words, it is focused squarely on investing in long-term care facilities -- which is basically what LTC stands for. Normally a fairly consistent business, COVID-19 has turned senior housing into a very uncertain place.
The coronavirus tends to spread easily in group settings, and the elderly appear to be most at risk from the disease. That's not good news for LTC, since the whole purpose of the senior housing properties it owns is to bring older people together in a group setting. Worse, people with other illnesses tend to see higher mortality rates, which means that nursing homes (which is where the sickest seniors end up) are likely to see the biggest hit from COVID-19. Since nursing homes and assisted living facilities the REIT owns comprise the bulk of its revenue, with another 18% or so of the top line derived from mortgages related to nursing homes. LTC is in the heart of the COVID-19 storm.
Although the REIT leases out all of its facilities to others under long-term contracts, the hit from COVID-19 will make it more difficult for lessees to afford rent payments. Lessees' costs are rising because of increased cleaning efforts and elevated employee expenses. Meanwhile, occupancy levels at lessees' facilities are decreased by fewer people moving in -- and, of course, residents who pass away. Higher costs at a time when revenues are falling does not augur well for the REIT. And until the world has a better handle on COVID-19, the future will likely remain very uncertain for LTC Properties.
LTC Properties isn't a bad REIT, but today it happens to operate in a particularly troubled property sector. Investors should brace themselves for an extended period of uncertainty and, likely, weak financial results. Investors should probably be at least contemplating the chance of a dividend cut. April's gain was exciting, but it doesn't change the fundamental picture at all.