Updated May 20, 2021 by Bob Ciura
The demographics of the United States is subject to seismic change as the baby boomers get older. The baby boomers are a very large generation group, which means that the aging US population is expected to result in higher demand for health care.
Many investors have raised concerns about how this will affect the economy. While some sectors of the economy are under pressure from this trend, it is almost certain that one sector will grow as a result: healthcare spending, or real estate investment trusts or REITs in healthcare for short.
LTC Properties (LTC) is poised to capitalize on this trend. As a leading owner and operator of healthcare real estate, LTC sees increasing demand for its real estate.
We believe LTC is an attractive investment for high income investors. The stock has a high dividend yield of 5.8% and pays those dividends monthly. There are currently fewer than 60 monthly dividend stocks.
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While LTC Properties stands ready to take advantage of the aging population, this does not guarantee that the stock will perform well in the future. A fundamental analysis is still required.
This article analyzes LTC Properties’ investment prospects in detail.
LTC Properties is a healthcare real estate investment trust that owns and operates qualified nursing homes, assisted living facilities, and other healthcare facilities. The portfolio consists of approx. 50% senior housing and 50% qualified NuProperties. The REIT owns 18th0 Investments in 27th States with 30th Operating partner and has a market capitalization of $1.5 billion.
Source: Investor Presentation
Just like other healthcare REITs, LTC is benefiting from a strong secular trend, namely high population growth is over 80 years old. This growth results from the aging of the baby boomer generation and the steady rise of life Anticipation thanks to continued advances in medical science.
LTC is currently facing a major challenge, the bankruptcy of Senior Care Centers, the largest skilled nursing staff in T.exas. Senior Care filed for Chapter 11 bankruptcy in December– –2018. Until 2018it generated 9.7% of the year Sales of LTC and was LTC’s fifth largest customer.
in the end of April, LTC reported (4th/.29/.21) Financial results for the ffirst a quarter of Fiscal 2021. F.and from operations (FFO) Per share decreased – –16% Over latest Quarter of the yearfrom $ 0.74 to $ 0.62, due to the sale of assets Losses and rental income lower than Result of non-payment of lease obligations from Senior Lifestyle and some rent deferrals.
L.TC faces another headwind in the form of the coronavirus pandemicwhich has led to payment deferrals for some tenants. As a result, LTC has no guidance provided for 2021. D.because of the pandemic, The trend reversal is currently on hold but we believe that the is worse behind LTC.
As mentioned earlier, LTC Properties will benefit from the secular tailwind of the aging population in the US. As the baby boomers get older, the demand for qualified care and serviced residential properties will increase significantly. This benefits the LTC properties in two ways.
First, greater demand for its real estate means LTC can buy more real estate and expand its asset base. If this can be done conservatively – without diluting the REIT’s shareholders – it will increase the trust’s operating funds per share.
Second, LTC Properties will have a tangential advantage as its tenants (healthcare operators) will have higher demand for their services. With their services in high demand, this reduces the likelihood of their leases defaulting and also reduces LTC Properties’ tenant vacancies.
This REIT has invested a lot to capitalize on this trend. Since 2010, LTC has invested over $ 1.5 billion in new real estate investments.
Thanks to the favorable health fundamentals mentioned above, LTC has built its funds Operations at a 4th.5% annual average rate over the past decade. In addition, the REIT owns most of its assets in the states the highest projIn the next ten years, the cohort with more than 80 inhabitants increased. On the other hand, has growth stalled in the last four Years, due in part to Senior Care’s bankruptcy.
In addition, the REIT has Been affected by the pandemic, but we expect this crisis weaken in the the second half of this year thanks to the vaccination program on road. We continue to expect Funds from Operations growth of 3.0% over the next five years.
Competitive advantage and recession performance
LTC Properties has a cost-based competitive advantage as it is a triple net REIT. This means that LTC’s tenants occupy the properties under triple net leases, which means that tenants must bear the three main costs of occupying the property:
- Insurance expenses
- Property tax expense
- Maintenance costs
By operating as a triple net REIT, LTC Properties has reduced operator risk to essentially zero – which should be seen as a huge plus for LTC investors.
In addition, LTC Properties has a competitive advantage that comes from both owner and a developer of healthcare properties. The company has a real estate development side business that generates substantial profits. Even so, the development business is small compared to the owner business.
The geographic diversification of the trust is excellent as its properties are spread across 27 states. This helps diversify the trust’s exposure to shocks in the local economy and gives the trust hold in a variety of markets that it can leverage for future expansion.
As a healthcare REIT, LTC Properties should perform well during an economic downturn (compared to non-healthcare REITs). This is because health care is a necessity – consumers are very different from cutting spending on skilled care or assisted living when their disposable income becomes scarce.
In terms of dividend securitythe payout ratio is a healthy one 7th6th% expected in 2021 and the balance sheet is in decent shape, with debt to Adjusted EBITDAre relationship from 4.3x and an interest coverage ratio of 2.9x.
Source: Investor Presentation
As a result, the dividend can be sustained if the pandemic continues to recover. The REIT has one smooth debt Due schedule these year but it may be a little bit pressured in 2022, though 21% of its debt ($ 138 Millions of dollars665 Million), especially if the prevailing terms and conditions are not favorable Next year.
Valuation and expected returns
Based on the expected FFO per share of $ 3.00 for 2021, LTC shares currently trade at a P / FFO ratio of 13.1. This is below our fair value estimate of 14.9, which is the average multiple of the stock’s valuation over the past decade. If the P / FFO multiple increased from 13.1 to 14.9 over the next five years, it would increase the annual return over that period by 2.6%.
The growth rate of the trust is likely to be relatively low in the coming years. We believe investors can expect LTC Properties to grow its cash from operations per share at a low single-digit rate averaging 3% per year over economic cycles.
Finally, the return is fueled by the high dividend yield of 5.8%.
Overall, we expect LTC to generate a total return of 11.4% per annum over the next five years. This is a strong return that makes LTC stock a buy for high income investors.
LTC shares many of the characteristics of a solid dividend investment. The company has a strong dividend yield of 5.8% (more than three times the average dividend yield of the S&P 500) and is very shareholder friendly and pays those dividends monthly.
The trust will also benefit immensely from the secular aging trend of the local population. While FFO growth has been hard to come by in recent years, with a high dividend yield, the stock appears to be undervalued in an effort to further boost shareholder returns.
With this in mind, LTC Properties appears attractive to high income investors looking for exposure to the healthcare REIT space.
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