LTC Properties: Strong Buy?

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About: LTC Properties, Inc. (LTC)
by: Achilles Research
Summary

LTC Properties is a top-notch income vehicle in the healthcare sector.

The healthcare REIT has a strong portfolio and dividend coverage stats.

LTC Properties easily out-earned its dividend payout with funds from operations in the last quarter.

Shares are reasonably valued.

An investment in LTC yields 5.2 percent.

Income investors seeking access to a high-quality, growing dividend from a well-managed healthcare real estate investment trust may want to take a closer look at LTC Properties, Inc. (LTC). The healthcare REIT benefits from favorable long-term trends in the industry and has strong portfolio and distribution coverage stats. LTC Properties' shares are sensibly valued, have an attractive risk/reward, and offer income investors an entry yield of 5.2 percent. The yield on cost is most likely going to rise going forward.

LTC Properties - Portfolio Snapshot

LTC Properties is a diversified healthcare real estate investment trust with a growing investment portfolio. The healthcare REIT primarily invests in skilled and assisted living facilities. At the end of the December quarter, the REIT's facility portfolio included 197 properties valued at $1.67 billion.

Here's a portfolio snapshot.

Source: LTC Properties Q4-2018 Supplemental

LTC Properties' healthcare facilities are spread out all over the United States. The healthcare REIT has a strong presence in markets with large, growing elderly demographics.

Source: LTC Properties

Texas is still LTC Properties' largest market, thanks to the states large and growing elderly population. Texas accounts for 17.5 percent of the REIT's total investments, while Michigan comes in second representing 14.8 percent of investments.

Source: LTC Properties

LTC Properties also is moderately diversified in terms of its operator base. The largest tenant, Prestige Healthcare, accounts for 18.0 percent of its annual income. The more diversified a healthcare REIT in terms of operators, the lower cash flow and dividend risks for shareholders.

Source: LTC Properties

Long-Term Growth

LTC Properties benefits from an aging U.S. population and rising healthcare expenditures in the healthcare sector through its senior-focused facility portfolio. Elderly demographics (65 years of age and older) are projected to grow dramatically going forward which points to long-term FFO growth potential for LTC Properties.

Source: Healthcare Trust Of America

Low Leverage Ratios

LTC Properties has maintained stable leverage ratios over time which means the company has grown without increasing risks to shareholders. The debt-to-gross-asset-value-ratio hit 35.2 percent at the end of the December quarter, below its three-year average of 37.1 percent. Low leverage protects investors in the event of a market downturn or an industry recession.

Source: LTC Properties

Distribution Coverage

LTC Properties has a conservative FFO payout ratio and, hence, a high margin of dividend safety. In addition, LTC Properties is growing its dividend payout slowly, but steadily.

The healthcare real estate investment trust earned an average of $0.77/share in the last 12 quarters and paid out an average of $0.56/share. The implied (average) FFO payout ratio is 73 percent, leaving heaps of room on the table for dividend growth as well as additional property investments.

Here are LTC Properties' updated distribution coverage stats.

Source: Achilles Research

LTC Properties also can afford to raise its dividend, something the REIT has done in the past. LTC Properties currently pays $0.19/share monthly for a total quarterly dividend payout of $0.57/share.

Here's LTC Properties' five-year dividend growth chart.

Chart Data by YCharts

Valuation

LTC Properties' dividend stream currently sells for ~13.5x Q4 2018 run-rate funds from operations, which is a reasonable FFO multiple given the REIT's low leverage, diversified portfolio and conservative FFO payout ratio.

And here's how LTC Properties compares against other major healthcare REITs in the sector in terms of price-to-book-ratio.

Chart Data by YCharts

Risk Factors Investors Need To Consider

The biggest risk factor for LTC Properties, in my opinion, relates to its operators. As long as the REIT's operators make their contractual rent payments, everything is fine. Problems start, however, when one of LTC Properties' tenants runs into financial trouble and cash flow problems arise. Investors have to carefully monitor LTC Properties' financial performance, operator health, and distribution coverage stats going forward in order to react timely to a deterioration in the REIT's fundamentals.

Your Takeaway

LTC Properties is a compelling income vehicle for a lot of reasons: The healthcare REIT easily outearns its dividend with funds from operations and the FFO-payout ratio leaves room for dividend growth. The company has moderate leverage ratios and benefits from long-term growth trends in the healthcare industry (aging U.S. population, growing healthcare expenditures). Shares are moderately valued and offer income investors a growing dividend stream. The monthly payment schedule is attractive as well. Buy for income and capital appreciation.

Disclosure: I am/we are long LTC, WELL, HCP, VTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.