The coronavirus pandemic was a massive headwind for the types of senior living properties that real estate investment trust (REIT) LTC Properties (LTC 0.10%) owns. Although the pandemic wasn't an issue unique to LTC, since the impact was felt by all senior housing landlords, LTC Properties is modestly sized and needed to deal quickly with its problems if it wanted to maintain its dividend. Here's what it did during the darkest days of the pandemic and why the dividend looks increasingly secure.
Hit hard
LTC Properties has a market cap of around $1.3 billion today. Even before the pandemic, its market cap was only around $2 billion. Compared to the healthcare REIT industry's biggest names, it is a tiny player. Being small constrains LTC Properties' options.
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To make matters worse, early on in the pandemic LTC Properties was already working with troubled tenants in an effort to strengthen its portfolio. Notably, the funds available for distribution (FAD) payout ratio was 77% in 2020 but weakened to 100% by the third quarter of 2021. That's not a good trend, and investors were rightly worried about the future of LTC properties' dividend.
However, having started early on dealing with weak tenants LTC Properties actually got something of a head start. Notably, nursing home- focused Omega Healthcare announced in early February 2022 that a fourth tenant had stopped paying rent. That senior housing REIT is expecting several more quarters of turbulence as it works to deal with the issue. LTC Properties, further along in such processes, announced that its fourth-quarter FAD payout ratio improved to 93%. While that's not a particularly good number, it is going in the right direction.
The biggest change
Moving away from troubled tenants by selling assets and shifting assets to new operators has been an important effort for LTC Properties. These are exactly the same steps that Omega is working on right now. However, there's another change that took place within LTC Properties' portfolio that investors should understand.
At the end of 2020, loans receivable made up 14.7% of the company's portfolio. By the end of 2021, mortgage loans and notes receivable was up to 20.9% of the portfolio. Basically, loans of some sort increased by roughly 40%. That's a massive and purposeful change. The key here is that management looked at the investing landscape and acted to ensure that it could continue to support its dividend in the near term by buying senior housing mortgages.
NYSE: LTC
Key Data Points
Buying senior housing properties during the pandemic would have meant paying up front for a property which would only benefit the REIT's results in the future, after the headwinds had eased. Such investments would be a drain on near-term results and weaken the company's ability to pay dividends. But, LTC Properties believes that the senior housing sector will rebound over time because of the necessity of the services provided and the aging of the baby boomer generation.
So, instead, management found a middle ground by expanding its exposure to mortgage loans focused on the senior housing space, thus allowing the REIT to continue to invest in its preferred sector. And, perhaps more important, the loans provided immediate cash flow from the interest payments. So, all in, this portfolio shift has allowed LTC Properties to protect its ability to pay dividends at a time when peers have been either cutting dividends or their dividend coverage has been severely stressed. And once the loans are paid back, LTC Properties can easily switch gears and put that cash to work buying physical assets, assuming the worst of the pandemic impact has abated by that point.
An investor-friendly change
LTC Properties moved quickly to ensure that it could protect its dividend during a difficult time for the senior housing sector. So far, the shift toward mortgage investments has paid off, as the dividend remains intact. That's not to suggest that LTC Properties' dividend looks 100% safe today, noting the still-high FAD payout ratio. However, the worst of the hit appears to be in the past, thanks to the changes this REIT made to its portfolio. With a 6.7% dividend yield, more aggressive investors might want to take a second look at this nimble senior housing REIT. It still needs close monitoring, but management has proven it can succeed even in the face of massive headwinds.
