A survey of health-care REIT managements suggests that yields on new projects are approaching the 10%-plus area.
thestreet.com
Building Blocks: Looking for Healthy Returns from the Sickest REITs
By Christopher S. Edmonds
Special to TheStreet.com
10/6/98 4:15 PM ET
The first three quarters of this year left REITs behind the broader market by over 20 points. Through the end of September, the SNL Securities REIT index lost 17.06% compared to a gain of 4.51% for the S&P 500.
And the third quarter was the worst of the three for REITs, with the SNL index losing almost 13% of its total value in the July-September period. Without a strong bounce in REITs in the middle of September, the index would have been down over 20% for the quarter.
While uncertain whether REITs will provide the fourth-quarter rally they have become known for, there are certainly angles that capture the rich dividends many REITs provide while still giving your portfolio the potential for modest, yet meaningful, capital appreciation. One answer may be a healthy approach toward real estate investing.
Healthy Investing
One answer may lie in one of the sickliest sectors of the REIT kingdom this year -- the REITs that own hospitals, clinics and long-term care facilities. The uncertainty surrounding Medicare reimbursement, concerns about overbuilding and the shenanigans of Meditrust (MT:NYSE) have hampered the health-care REIT industry since late last year, with health-care REITs losing almost 15% through Sept. 30.
While the Medicare issues remain, demand for care facilities continues to outpace supply, and Meditrust's completion of its merger with LaQuinta Inns removed the company from most health-care comparisons.
At least one analyst believes the health-care sector is ripe for a speedy recovery. "Fundamentals for [health-care REITs] in 1999 appear excellent," said Schroders' Jeff Bagley in a recent report. "With the spread between health-care REIT dividend yields and those of treasury securities at an all time high, the attractiveness of these stocks which enjoy solid dividend growth prospects is enhanced."
Bagley believes the pricing pressures seen in the health-care REIT sector are easing. As banks become more reluctant to provide traditional financing for health-care projects and mortgage conduit transactions slow, rents and lease revenues appear to be stabilizing and even increasing for health-care REITs. A survey of health-care REIT managements suggests that yields on new projects are approaching the 10%-plus area.
"This is a far and welcome cry from the traditional '10-year Treasury plus 300 to 400 basis points' quotes that once were common in the industry," suggested Bagley.
With the average health-care REIT yielding 8.8% and estimated funds from operations, or FFO, growth of 5% to 6% in 1999, these REITs could provide healthy double-digit returns in the year ahead. Bagley especially likes Nationwide Health (NHP:NYSE), Omega Healthcare (OHI:NYSE) and Ventas (VTR:NYSE), a non-REIT real estate company.
Health-Care REITs
PRICE DIV YIELD
American Health Properties
AHE 22.75 1.09 4.79%
Capstone Capital
CCT 21 1.47 7%
Health Care REIT
HCN 26.125 1.64 6.28%
Health Care Property Investors
HCP 32.438 1.95 6.01%
Healthcare Realty Trust
HR 25.313 1.55 6.12%
LTC Properties
LTC 16.938 0.76 4.49%
National Health Investors
NHI 29.875 1.48 4.95%
Nationwide Health Properties
NHP 22.125 0.84 3.8%
Omega Healthcare Investors
OHI 31.75 3.67 11.56%
While the Criimi bankruptcy may be the sacrificial lamb, the other mortgage-backed REITs have fallen from favor as well. SNL's MBS index is down 21.2% for the year, losing 16.1% in the third quarter alone. Other MBS REITs that have taken a hit this year include Capstead Mortgage (CMO:NYSE), down 85%; Hanover Capital (HCM:NYSE), down 58%; and Redwood Trust (RWT:NYSE), down 51.1%. With the combined threats of prepayment and a possible recession down the road, don't look for many of these companies to perk up any time soon. |
