When we look back, 2020 will go down as the year dominated by the coronavirus. However, 2021 is likely to be the year that we defeat that scourge, assuming that the current vaccines work as hoped. If that comes to pass, then monthly dividend payer LTC Properties (LTC -0.39%) could be a good choice for investors, assuming you get in before things start to materially improve for senior housing real estate investment trusts (REITs).
What the REIT does
Healthcare real estate investment trust LTC owns 73 skilled nursing facilities and 107 assisted living homes. Skilled nursing accounted for roughly 57% of the company's rent roll, with assisted living virtually all of the rest. Senior housing has not been a great sector in 2020 given the impact of the coronavirus.
Basically, seniors appear to be most at risk from COVID-19, and group settings foster the spread of the illness. That's a double whammy that's led to increased move-outs (often a euphemism for residents dying), reduced move-ins, and increased costs for staff and cleaning. These issues have been particularly hard on some healthcare REITs because of their senior housing operating portfolios (SHOP). These are properties that REITs own and operate (technically they hire operators). The property-level performance, which has been rough in 2020, flows through to the REIT.
LTC doesn't have a SHOP portfolio, it just leases its assets to others. So throughout this rough patch, the big issue has been collecting rent -- not worrying about running senior housing facilities. On that score, LTC has done fairly well. In the third quarter, it collected 94% of the rents it was due, with only one major tenant causing material problems. It's not a small issue, with the tenant operating 23 properties and accounting for around 7% of the rent roll. But it appears manageable at this point, especially if the coronavirus vaccines work as hoped.
Digging a little deeper
The key here is that LTC's normalized funds-available-for-distribution payout ratio in the third quarter was roughly 80%. That's not an outlandish number given the material issues facing the healthcare REIT sector. Part of the strength is the company's balance between third-party payment properties (nursing homes), which make up about 40% of the company's total rents, and private pay (assisted living), which accounts for the rest. Nursing homes are generally necessity-based properties covered by Medicare and Medicaid, and payment was really never an issue. Private pay was more of a concern, but because LTC doesn't have a SHOP portfolio, that risk was bigger for its tenants than for LTC.
To be fair, occupancy at its facilities was impacted by the coronavirus pandemic. But, again, that's an issue for the operators of the assets, not LTC. Notably, nursing homes are still covering their rent payments by nearly 1.4 times, while assisted living facility coverage has dipped below 1.1 times. The latter number is a bit troubling, but should improve with time, assuming a successful and widely distributed vaccine. Meanwhile, the dividend remains solidly covered, providing a little wiggle room for further adversity on the senior housing front.
Looking to the new year
So the big takeaway here for dividend investors is that LTC is a senior housing-focused healthcare REIT that appears to be holding up relatively well during trying times. The dividend, which is providing investors with a generous 5.9% yield, looks like it should hold.
However, as the rollout of a vaccine begins to take shape in 2021 the picture here is likely to start improving. That means now is the time to act, even though the winter is probably going to be filled with more negative COVID-19 news. This isn't a REIT for the faint of heart, but those that can handle some uncertainty and think long-term should definitely take a closer look.