Senior housing has been at the center of the coronavirus storm from day one. LTC Properties (LTC -0.48%), with rents split roughly 60/40 between nursing homes and assisted-living facilities, has had its fair share of problems. But it has managed to muddle through without a dividend cut and is still supporting its quarterly payment through the first quarter of 2022, giving the shares a yield of 6.4% based on a recent stock price of about $35. As the real estate investment trust (REIT) gets ready to report full-year 2021 earnings, these are two things you need to look out for: one a potential red flag, the other a green one.
1. The bad news
For investors, the biggest red flag that needs monitoring is probably LTC Properties' payout ratio. In the third quarter of 2021, the REIT was paying out roughly 100% of its funds available for distribution. That's a very troubling number, since it means LTC Properties doesn't have much breathing room if more things go wrong.
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The problem is that a lot has gone wrong already and the hits just keep coming. Basically, seniors are more at risk of severe illness from the coronavirus than younger people. And it spreads very easily in group settings. LTC Properties specifically owns properties that bring older adults together in group settings.
The good news here is that, unlike some other senior housing REITs, LTC Properties doesn't operate any of its own properties. So its tenants have to pay their rent no matter what is going on at the property level. Only that doesn't work out so well when a tenant doesn't earn enough to actually pay rent, at which point LTC Properties has to grant concessions or find another tenant. It's had to do both over the past couple of years.
2. The good news
Which brings this story to the green flags. For starters, the REIT has already transitioned away from a major tenant (Senior Lifestyle) that was facing financial hardship. That process, largely completed by the third quarter of 2021, will start to bear fruit in 2022 and beyond as stronger tenants start to get these properties back on track. In other words, this negative should be turning into a positive very soon.
But that's not the only potential good news. Occupancy levels at the company's properties have also been increasing after falling during 2020. During LTC Properties' third-quarter earnings conference call, Chief Investment Office Clint Malin noted, "Private-pay occupancy was 77% at September 30, 75% at June 30, and 73% at March 31. For our skilled portfolio, average monthly occupancy was 71% in September, 70% in June, and 69% in March."
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To be fair, the trend is going the right way, but the absolute numbers are still not so great. Basically, there's more work to be done. However, given the need-based nature of senior housing, the directional shift is nice to see and, notably, has continued despite the lingering pandemic issues the world is facing. It remains to be seen what new variants do to the trend, but if the numbers continue to improve, LTC Properties will be in increasingly good shape. And that will bolster its ability to keep paying its dividend.
When the company reports earnings, pay particular attention to the portfolio-level improvements.
A lot of moving parts
Clearly there are other things going on at LTC Properties that have to be monitored, like its shift toward providing debt financing to others over buying properties. That move is intended to bring cash in today instead of having to wait for rents to improve at new assets. However, when you really boil the business down, income investors need to pay extra attention to this REIT's ability to keep supporting its dividend. That's going to be a mix of its payout ratio and how well its properties are recovering from the pandemic hit. And that's where most of your attention should be when LTC Properties reports earnings on Feb. 18.
