LTC Properties (NYSE:LTC) owns senior housing assets, with the LTC in its name standing for long-term care. That's been a terrible sector of the real estate market to be active in thanks to the coronavirus pandemic. As a result, LTC Properties' dividend is looking pretty shaky these days. But management seems to remain pretty confident despite the headwinds.
Here's what's going on.
Sucker punched by COVID-19
While predicting that a global pandemic would one day happen wasn't hard (after all, it's happened before), it would have been impossible to predict 2020 would be the year. And it would have been equally difficult to predict beforehand that the illness would be most deadly to older adults. That it would spread most easily in group settings was probably a given in any scenario.
But when you put all of that together, it's not all that surprising that the senior housing sector, which brings older people into group settings, wasn't prepared for the coronavirus and couldn't have adequately foreseen the terrible health events that transpired in 2020.
Real estate investment trust LTC Properties was really no different from any other senior housing player. In the pandemic, the company took it on the chin as the underlying occupancy at its properties fell. It was a logical expectation, as move-outs (this is industry lingo that also includes resident deaths) rose and move-ins fell in the face of intense uncertainty.
However, LTC Properties, which owns nursing homes (about 50% of its properties and 60% of revenue) and assisted living assets (50% and 40%, respectively), held firm through the year and into 2021. Management believes that the future will be much brighter and that business will get back to normal in relatively short order, although the pandemic has not yet ended. To that end, occupancy levels have been trending higher of late, which is a good sign that the operating environment for LTC Properties' lessees is indeed improving.
It's notable that LTC Properties uses a net-lease approach, meaning its lessees are responsible for most of the operating costs of the assets they occupy. LTC Properties has to be paid its rents no matter what's going on. It has been working with some tenants on that, given their specific situations, but hasn't seen a material uptick in requests for rent deferrals or other forms of assistance. Thus, LTC Properties has held its monthly pay dividend steady at $0.19 per share per month throughout the pandemic, the level at which it has remained since the fourth quarter of 2016.
The problem number
This is clearly a positive for shareholders, but that doesn't mean there's no risk. Notably, in the third quarter of 2021, the funds available for distribution, or payout ratio, were roughly 100%. That's a troublingly high number and suggests that there is a real risk of a dividend cut here. The payout ratio can rise above 100% without a cut if the board of directors wishes, so long as the company is willing to support the dividend payment using debt. But that generally can only go on for a short period of time.
And yet, management seems fairly positive that the dividend will hold. For example, it noted during LTC Properties' third-quarter 2021 earnings conference call that the payout ratio would have fallen to 96% if recent investments were taken into consideration. While 96% is only slightly better than 100%, it's clearly a move in the right direction and suggests that there may be more wiggle room than there appears. Still, the long-term target payout ratio for LTC Properties is roughly 80% of funds available for distribution -- and 96% is a long way from that.
Important to management's positive outlook for 2022 (and a lower payout ratio) is that it has been working over the past year or so to shift properties from weak tenants to stronger ones. That process has pretty much been completed at this point, but the real benefits won't start showing up until 2022. In fact, LTC Properties noted that it expects its funds from operations numbers to improve by two or three cents a share between the third and fourth quarters this year, which suggests things are, indeed, getting better as expected.
All in, investors looking for a consistent monthly dividend should probably give LTC Properties the benefit of the doubt, even though dividend coverage is clearly very tight right now. Management believes the future will be brighter than the recent past, and recent results suggest that seems like a reasonable expectation.
Don't give up just yet
It's not easy holding a company through difficult times, but LTC Properties has, so far, proven it is muddling through the pandemic in relative stride. Yes, the dividend looks dicey right now. But given the ongoing strong support from management, and the improving results at its properties, it seems likely that the payment will survive this trying period. There's obviously no guarantee that the dividend won't get cut, but investors that can handle some adversity are getting well rewarded with a 6.8% dividend yield here. Given the low-yield environment today, this is probably a worthwhile risk/reward trade-off.