As COVID-19 has overwhelmed senior housing facilities and the people who live and work there, the public health crisis has turned into a financial tailspin for these centers' owners and operators. Many real estate investment trusts (REITs) that focus on this property niche have cut their dividends.
LTC Properties (LTC 1.02%) hasn't, though, and believes that it can muddle through until the effects of the pandemic diminish and the industry recovers. Here's why you can trust this high-yield healthcare REIT.
A hard time
COVID-19 spreads easily in group settings, and it's particularly risky for older adults. That's a huge problem for the senior housing sector.
Healthcare real estate investment trust giants Ventas, Welltower, and Healthpeak all cut their dividends because of the pandemic. In fact, Healthpeak has even decided to jettison most of its senior housing assets so it can refocus on better-performing medical office and medical research facilities (Healthpeak's dividend cut came at the start of 2021 after it announced its portfolio overhaul).
Relatively small LTC Properties has bucked the trend and held the line on its dividend. The stock offers a generous yield of 5.6% at Friday's prices and a monthly payout. That yield is notably higher than the S&P 500 Index's miserly 1.4% yield, as well as the REIT average of around 3.2%, using Vanguard Real Estate Index ETF as a proxy.
However, the fact that LTC Properties hasn't cut its dividend doesn't mean that it has gone unscathed. For example, in the first quarter of 2021, it noted that it was granting material rent concessions to some tenants to help them muddle through the pandemic. It is also working to transition assets from troubled tenants to new ones.
Basically, LTC doesn't expect 2021 to be an easy year. It specifically addressed the issue of its dividend, noting that it has historically targeted a funds available for distribution (FAD) payout ratio of around 80%. But this year that number is going to rise -- at least to 90%, if not even higher.
On the whole, that's not a good statement, but the company believes it is starting to see some green shoots. And it is making progress in its effort to integrate stronger operators into its portfolio. Thus, it believes 2022 will see a return to more normal operating performance. It may take until the middle of next year, but LTC's management believes the REIT will return to more normal payout levels over the next 12 to 18 months.
The key to the story
One of the big differences between LTC and the large healthcare REITs that cut their dividends is LTC's focus on net-lease properties. A net-lease property is one where the tenant is responsible for most of the operating costs of the asset. Basically, the landlord just sits back and collects rent. Ventas, Welltower, and Healthpeak all had properties that they both owned and operated (technically they hired people to handle the day-to-day work). In this setup, known as a senior housing operated portfolio (SHOP) in the industry, the performance of the assets flows through to the REIT. That was a terrible deal in 2020, as costs rose, occupancy fell, and new resident leads declined because of the pandemic.
LTC Properties was basically insulated from that headwind. But there's another piece of the puzzle: LTC Properties' portfolio is split roughly 50/50 between nursing homes and assisted-living properties. There are very different dynamics in who pays for these two categories of housing. Assisted living is generally private-pay, while nursing homes are usually paid by Medicare or Medicaid. Investors have historically preferred private-pay, because it isn't reliant on government payments, which can get political and change unilaterally. However, with around 40% of its rents supported by Uncle Sam, LTC Properties has a strong and reliable core in a business that is necessity-driven. Put a different way, the government kept coming through when the chips were down.
Meanwhile, the recovery that LTC Properties' management is expecting is being driven by two key trends. In the short term, it's the rollout of vaccines, which is helping the economy to open back up again. That should also make it much safer to be in a senior housing facility, and lead to a rebound in the sector. Over the long term, baby boomers continue to crest into their retirement years in huge numbers. Older people simply need more care than younger ones. This massive demographic transition is far from over, and underpins what is expected to be material growth for senior housing. LTC Properties is well positioned to serve the still-growing need here.
A dividend you can still count on
To be fair, it wouldn't be correct to suggest that LTC Properties is a low-risk REIT investment. The rising FAD payout ratio is a notable risk that should probably warn off particularly conservative investors. However, if you can handle some short-term uncertainty, management is laying out a very clear path back to better dividend coverage, and making solid progress on the difficult trip it's taking. And, just as important, it is clearly willing to support the dividend as it works through the pandemic impacts it is facing.