What happened
Shares of LTC Properties (LTC +0.05%) slumped 12.3% in 2021, according to data provided by S&P Global Market Intelligence. The senior housing market's continued headwinds weighed on the real estate investment trust (REIT).
So what
LTC Properties experienced a significant decline in funds from operations (FFO) and funds available for distribution (FAD) in 2021. FFO was down nearly 21% to $68.8 million through the third quarter, while FAD declined almost 19% to $69.6 million. Because of that, the REIT paid out 100% of its FAD during the third quarter to support its 6.4%-yielding monthly dividend.
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The main issue is the pandemic's impact on the senior housing sector. Several of LTC Properties' tenants couldn't pay rent, which impacted the healthcare REIT's rental income. While it deferred and abated some rent to assist its tenants, a couple declared bankruptcy. Their financial issues forced LTC Properties to find new tenants for some of its facilities. It also sold several facilities leased to financially struggling tenants in 2020 and 2021, impacting its rental income. Meanwhile, it opted to reduce its 2021 rent escalations by 50%, limiting its income growth on leases where tenants were currently paying rent.
LTC Properties did have some positives in 2021. It was able to transition several properties leased to two bankrupt tenants to other operators. These leases will start generating some rental income for the company as the properties stabilize in the coming quarters.
It also funded nearly $100 million of mortgage loans secured by skilled-nursing, assisted-living facilities, and senior housing properties in late 2021. These loans will supply the REIT with steady interest income over the next few years. These lease agreements and loan investments position LTC Properties to grow its revenue in 2022 and beyond.
Now what
Last year was another tough one for the senior housing sector and LTC Properties. Its rental revenue declined as several of its tenants remained unable to meet their rental obligations. However, that tide started turning last year as some tenants declared bankruptcy, enabling LTC to settle with them and move on by securing new tenants for several of those properties. It also made new loan investments toward the end of the year, which along with new rental agreements, should help turn around its FFO and FAD in 2022.
Because of that, the REIT believes it can maintain its high-yielding dividend, making it a potentially attractive option for investors seeking an above-average passive income stream.
