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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 oversimplification to say that most medical-related investments benefit from demographics and health care inflation. But the health care REIT sector is one that should continue to exhibit strength for months, if not years, to come. HealthCare REITs - A Good Bet on Aging Baby Boomers Heather Smith, Morningstar 9-29 A host of reasons - product recalls, patent expirations, thin drug pipelines, Medicare and Medicaid cuts, and uninsured patients - increase the risk of investing in health-care stocks. Investors seem to agree; the Health Care Select Sector SPDR has underperformed the S&P 500 the past three years. While we think health-care companies such as Boston Scientific, Johnson & Johnson, and Watson Pharmaceuticals are trading at bargain-basement prices, we're sympathetic to investors' concerns about the future of the health-care sector. Volatility is high, with small changes in the industry landscape producing large swings in stock prices - shares of health-care operator Kindred Healthcare (KND) tumbled 25% one day in January because of a proposed Medicare rule change. How can investors gain exposure to health-care without opening themselves up to unmitigated risk? By buying shares of health-care real estate investment trusts, investors can play the aging American demographic while avoiding most of the downside associated with health-care services companies. Health-care REITs own hospitals, skilled nursing facilities, independent and assisted-living facilities, medical office buildings, or any type of health-care real estate. Because of federal laws, REITs cannot provide health-care services, so they hire operators such as Brookdale Senior Living (BKD) to perform these services. As a result, the actual residents of these facilities are not particularly important to the REIT; the trusts are more concerned about the quality of the operator, which helps determine the REIT's credit rating. Health-care REITs were created in the mid-1980s when health-care services companies such as Kindred and Universal Health Services spun off their real estate; most REITs have since diversified their portfolios so that their parent companies account for less than half of revenue. Like other REITs, a health-care REIT must pay out at least 90% of its taxable income as dividends, making for hefty dividend yields of 4%-7%. Several factors contribute to a health-care REIT's relatively low risk profile. For starters, the REIT's revenues are effectively guaranteed by its long-term leases. Operators sign leases ranging from three to 20 years that hold them responsible for property operating expenses (utilities, insurance, taxes, etc.) and include annual 2%-4% rent escalators. These stipulations provide a hedge against inflation and shield the REIT from rising energy costs. The leasing structure also makes it difficult for an operator to break its lease. First, it's against the law to stop providing health-care services (as part of the license required for most facilities), and second, the REIT is in constant contact with the tenant and is aware if its financial condition deteriorates. More often than not, the REIT will simply sell the property or find a replacement tenant given the recessionproof demand for health-care real estate. Above all, the REIT still owns the property and can take the proper steps to ensure that a healthy operator is in place. However, this scenario rarely plays out because REITs choose their operators carefully. Before signing a new tenant, a REIT meticulously reviews the operator's financial statements to ensure that cash flows comfortably cover the estimated rent payments. Some REITs, such as Nationwide Health Properties (NHP), protect themselves further by requiring tenants to sign one lease for all the facilities they rent from the REIT. That way, the operator cannot "cherry pick" the best assets and drop the less-profitable properties when their lease expires. Perhaps the smartest way health-care REITs reduce business risk is by lowering their exposure to Medicare and Medicaid, which are prone to government cuts. Although a REIT's rents are still protected by the terms of the lease, it can lose out on bonus rental opportunities (rents based on increases in a facility's revenue) and see the profitability of its operators decline precipitously. As a result, REITs tend to limit their ownership of hospitals and skilled nursing facilities--two property types that receive most of their revenue from Medicare and Medicaid. These government sources generally account for less than half of the income generated by a REIT's tenants, and in standout cases such as Senior Housing Properties Trust (NYSE:SNH - News), account for about 20% of total operator revenue. REITs prefer to own private-pay facilities such as independent and assisted living facilities that only admit patients who can afford their services. With this less price-sensitive demographic, REITs can raise rents without much problem. By comparison, health-care providers operate in an environment littered with risk. Their main customer, the government, sets prices unilaterally and often fails to cover the costs of providing health-care in its reimbursement. Hospitals must also admit uninsured patients in order to participate in the Medicare program. Finally, the business is extremely capital intensive, with labor shortages and bad debt expense only compounding rising costs. The stringent lease terms it accepts from the REIT exacerbates these problems, and illustrates how the landlord (the REIT) comes out ahead of the tenant (the operator) in the health-care industry. Here's why: Net operating income margins (a REIT's measure of profitability, which is determined by subtracting property operating costs from rental revenue) are 100% because of the REIT's leases that require the operator to pay property expenses on top of monthly rent. Administrative costs are low, with employee headcount below 100 at most of these firms. Consequently, average operating margins come in at 66%-70%, compared to 8%-12% for a health-care operator. REIT management teams have been adept at managing their portfolios. Health-care REITs have an excellent track record of investing in properties that generate returns well above their cost of capital. These firms' return on real estate assets (a REIT's version of return on invested capital) regularly reaches 13%, which towers over our REIT universe average of about 10%. Health-care REITs' immense profitability enables them to reinvest free cash flow in high-return projects, creating value for shareholders in the process. The outlook for the sector is strong, too. High demand for health-care services and slow supply growth has created a perfect storm for health-care REITs. Certificate of need laws existing (and rigorously enforced) in most states limit the construction of new hospitals and skilled nursing facilities. Though these barriers to entry do not apply to assisted-living facilities, construction of these facilities remains relatively low. Good health-care REITs are diverse in terms of geography and tenants, have a portfolio heavily weighted toward private-pay assets, possess savvy management teams with health-care and real estate experience, and maintain clean balance sheets and fully covered dividends. With this in mind, our favorite name is Health Care Property, the largest health-care REIT by market capitalization and revenue. We think this company is a leader in the industry, setting the standard for other REITs with its highly diversified portfolio, opportunistic business strategy, and investment-grade credit ratings. Another REIT we're fond of is Ventas. Under the direction of CEO and chairman Debra Cafaro, Ventas has evolved into a top health-care REIT with one of the highest returns on real estate assets--16% per year--in our universe. Finally, we also like Nationwide Health Properties . We believe that it has a bright future after restructuring its leases and lowering its dividend payout ratio. In our opinion, all of these stocks are fairly valued now, but we would eagerly scoop up shares should they fall into 5-star territory. Our least-favorite health-care REITs tend to fall short on our criteria listed above and have sticky corporate governance issues. Universal Health Realty receives nearly half of its revenue (excluding joint venture revenues) from its former parent company Universal Health Services. Complicating matters is the fact that Universal Health Realty shares its executives with Universal Health Services, creating a situation in which the tenant (UHS) is also the landlord. Another health-care REIT for which we'd require a large margin of safety before investing is Senior Housing Properties Trust. One operator, Five Star Quality Care, is responsible for more than 60% of annualized rent. Still, we believe our risk ratings accurately reflect our concerns about these REITs, and would still consider shares if they dropped to 5-star levels. Analyst Keen on Healthcare REITs, Cites More Favorable Economic Factors AP 8-30 A Ryan Beck & Co. analyst raised his price targets for several healthcare real estate investment trusts on Wednesday, expecting the sector to perform well on reimbursement from the government, stable interest rates and a cooling economy. Analyst Robert M. Mains said he is encouraged by Medicaid and Medicare rate increases, and said adequate government reimbursement removes a key investment risk. State Medicaid rates paid to nursing homes are up 2% to 3%, with most rate increases beginning July 1, and Medicare payments will rise on Oct. 1 by 2.7% to 3.2% for nursing homes, the analyst said. Mains also said that health care REITs will get a boost from stable interest rates. Also, as the economy cools, he said the relative attractiveness of operating REITs -- such as office, apartment and retail -- compared to healthcare REITs, declines. He maintains an "Outperform" rating on Health Care REIT, Health care Realty Trust and Ventas, expecting the companies to offer investors 12-month total return potential in the mid-teens or higher. Meanwhile, the analyst's take on Health Care Property Investors Inc. and Nationwide Health Properties Inc. is more cautious, due to a large pending acquisition by Health Care Property Investors and recent acquisitions by Nationwide Health Properties. Mains rates both companies "Market Perform," and still expects both to yield positive returns. Home Page Previous REIT Update Top Sites |