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Health Care Update for 9-29-06

Triple Net Lease Update for 09-29-06


Monthly Rating Changes

    On 9-05 Analyst Tony Howard of Hilliard Lyons downgrades LTC Properties from "long term buy" to "neutral." The 12-month target price is set to $23.50. In a research note published this morning, the analyst mentions that the downgrade in the rating is based on valuation, since the company’s stock is trading at a price higher than the 12-month target price. The healthcare REIT sector is expected to continue to witness consolidation in 2007 and LTC Properties is an attractive takeover target, the analyst says.

    On 9-14 Wachovia Upgraded HCP from Underperform to Market Perform. On 9-14 Ferris Baker Watts Downgraded OHI from Buy to Neutral. On 9-15 Hilliard Lyons Downgraded WRS from Long-term Buy to Neutral.

    On 10-02 AG Edwards Downgraded HCN from Buy to Hold.

    On 9-25 shares of American Financial Realty Trust declined after a Bank of America analyst downgraded the stock. It is down about 2 percent from the beginning of the year after dropping almost 4 percent Aug. 17, when the company said Chief Executive Nicholas S. Schorsh resigned by mutual agreement with the Board of Trustees. The board named Harold W. Pote president and chief executive and announced a restructuring plan. Analyst Ross Nussbaum downgraded American Financial to "Neutral" from "Buy," but said he liked the company's strategy to dropping noncore assets. Nussbaum also said there is a possibility that the company could trade higher if it is sold. In the meantime, repositioning efforts could cause "sloppy" results for a few quarters, the analyst wrote.

    On 9-19 American Financial Realty Trust [AFR] announced today that its Board of Trustees has declared a dividend of $0.19/share on the Company's common shares of beneficial interest for the third quarter of 2006. The dividend will be paid on October 20, 2006, to shareholders of record on September 30, 2006. The prior dividend was 27 cents per share.


Health Care REIT [HCN] to Buy Windrose [WRS]     MarketWatch 9-
     Health Care REIT on Wednesday said that it agreed to buy Windrose Medical Properties Trust for about $877 million, including debt, in a move to expand its senior-housing and health-care real estate portfolio. Under the terms of the agreement, which includes the assumption of $426 million in Windrose debt, each outstanding share of Windrose will be exchanged for 0.4509 shares of Health Care REIT common stock. At Tuesday's closing prices, this represents a price of $18.06 for each Windrose share. This is a 19% premium to Windrose's closing share price of $15.18 Tuesday. Shares of Health Care REIT slipped while Windrose shares soared, up 12.5% at $17.08.
    "Our strategic merger with Windrose creates a platform capable of driving superior growth throughout the full spectrum of senior-housing and health-care real estate. The enhanced tenant base and asset diversification produces an even stronger combined entity," Health Care REIT Chief Executive George Chapman said in a statement. The deal will create a company with more than 550 properties in 37 states and is expected to close on or about the year's end of 2006 and is subject to shareholder and other approvals. Health Care REIT expects the deal will add to 2007 fully diluted funds from operations.
    "The acquisition of Windrose Medical Properties Trust gives Health Care REIT two desirable features it previously lacked: a medical office building portfolio and a development company," wrote Ryan Beck & Co. analyst Robert Mains in a research note. "In the near term, however, given the price Health Care REIT is paying, we expect only a small amount of [funds from operations] accretion and modest [funds available for distribution] dilution," Mains added.


Ventas to Buy 67 Properties for $649M     AP 9-08
    Ventas agreed to acquire 67 health care and senior housing properties for $649 million from affiliates of Canada's Reichmann family. The properties are located in 16 states and include five properties in southern California, 19 United Rehab properties located mainly in Kentucky, eight Elmcroft assisted-living communities in the Southeast and 33 Outlook Pointe assisted-living properties in the mid-Atlantic region. After the deal closes, Ventas will lease the properties to Senior Care Inc. subsidiaries under a 15-year agreement with two five-year extensions. The deal will add about $50 million in annual rent to Ventas' annual rental revenue, representing a lease rate of 7.75% on the portfolio. Ventas expects the deal to help funds from operations in the fourth quarter, when the deal is expected to close. It is expected to add about 4 cents per share to funds from operations in the first year after the closing. Ventas will use a combination of cash and equity to fund the deal. The company will issue about 1.7 million common shares worth about $65 million to the Reichmann family at the close of the deal. The cash portion of the purchase price will be funded through the assumption of up to $30 million of existing secured debt, as well as with borrowings from Ventas' credit line and expected debt issues.


HealthCare REITs Still Sport High Yields     Jeffrey Kosnett, Kiplinger 9-27
    It used to be that when REIT yields dipped below 6%, it meant that the stocks were overvalued and it might be wise to stay away or cut back. Investors, however, have repealed -- or chosen to ignore -- that guideline. Shares of real estate investment trusts have appreciated so relentlessly since early 2000 that the average property-owning REIT today yields 3.9%. That figure doesn't vary much whether you look at apartment, office, retail or industrial REITs. Annual total returns continue to reach double figures, mostly from REIT share price appreciation, not income.
    One corner of the REIT world, though, still pays hefty dividend yields, on the order of 6% or more. These are the health-care REITs, a dozen small trusts that buy, develop and manage hospitals, nursing homes, medical office buildings and assisted-living residences. Some health REITs also finance these properties, and sometimes keep the mortgages in their portfolios. Because of their small size, there's not much research coverage on this group, and most major real estate mutual funds have few positions in the category. Measured by stock market value, the biggest health REIT, Health Care Property Investors (HCP), ranks 29th among all REITs. Only two other health REITs, Ventas (VTR) and Health Care REIT (HCN), are among the 50 largest.
    But there's nothing small about the results. Over the past three, five and ten years, health-related REITs have essentially matched the awe-inspiring performance of the full REIT spectrum. Granted, 2005 was a bad year. But the medicals have recovered nicely this year, returning an average of 25% through September 26, compared with 23% for all property REITs. Year-to-date returns for other REIT subsectors are 15% for retail, 21% for hotels, 29% for offices, and 32% for apartments, the best REIT category this year.
    It stands to reason that as Americans age and a growing share of the nation's resources flow into health care, the number of properties that house health-related establishments will rise. Unlike retailers, to take one example, or biotech startups, hospitals and medical practices don't usually go out of business. But the question remains: If medical real estate were as desirable as other commercial property, why do health care REITs yield so much more than other kinds of REITs?
    Morgan Keegan analyst Napoleon Overton has long experience with the REIT business and some theories explaining the yield gap. The discrepancy, he says, goes back to the late 1990s, when the federal government first cut back on Medicare reimbursements and the stock market decided that health REITs were much riskier than other kinds of real estate. This followed a period during which all kinds of developers and other investors -- not just REITs -- overbuilt hospitals and doctors' properties. When the government tightened the cash spigot, "the whole sector imploded," Overton says.
    But the medical business soon revived, and earnings and cash flows rebounded. "From a very difficult bottom, we've had a long period of good returns," adds Overton. He attributes the health care REIT discount (as seen in the group's higher yields) to a lack of investor attention. "Not as many real estate people understand hospitals as they do offices and retail," he says.
    It appears that medical real estate provides higher rents relative to values than other kinds of property. While apartments and high-traffic shopping centers with good tenants are changing hands at prices to yield 5% or so (rental income as a percentage of market value), 8% to 11% is the norm in medical. So after financing costs and the expenses of running the business, health REITs are able to pay higher dividends than REITs that are paying considerably more to buy or develop properties.
    Will it always be this way? If the government again squeezes doctors and hospitals, or the sector is beset by scandals of the sort that have rocked nursing homes in the past, the dividends will come under pressure, and share prices will get hit. That's the biggest risk. You also don't want to bet too much on one or two geographic areas, so you might check into REITs that own the most properties in the most places, such as Healthcare Realty Trust (HR), which closed at $38.61 on September 27 to yield 7.0%, and Health Care Property (HCP), which closed at $30.93 and yields 5.6%. Despite the similar names, they are two different entities and are not to be confused with each other or with Health Care REIT (HCN), yet another organization. At a price of $39.76, it yields 6.6%.
    Tax treatment of health care REITs can be tricky. REIT income is normally considered ordinary income because REITs are not taxed at the trust level. But part of the distributions from some health REITS, such as Healthcare Realty Trust, may be in the form of a return of capital. In those cases, you'll pay capital-gains taxes later but nothing right away on that part of the distribution.
    It's an oversi