This is an excerpt from the WSJ commenting on MT's recent earnings release.
Some market-watchers credit the company's sluggish stock price in part to uncertainty within the health-care sector, in particular
among the company's health-care tenants. Earlier this month, its second-largest tenant, Sun Healthcare Group Inc. (SHG),
revealed it would post a "significant" fourth-quarter operating loss as a result of a change to Medicare's reimbursement system
and a larger-than-expected decline in demand for services.
Under Medicare's new method, called Prospective Payment System, which took effect Jan. 1, health-care providers are paid a
flat rate per patient per day. In the past, Medicare simply reimbursed for cost.
The NYSE-listed stock closed down 1/8, or 0.9%, at 14 5/16 on volume of 576,000, compared with average daily volume of
618,900.
Sun Healthcare Group makes up about 8% of Meditrust's total revenues and about 15% of its healthcare lease operation revenue.
Of Meditrust's 421 facilities, it leases 40 to Sun Healthcare, Meditrust President David Benson said. But he pointed out that the
cash flow coverage of lease/loan payments is about 2 to 1. In other words, the cash flow generated from the properties is twice
the amount needed to make the lease payment.
PaineWebber's Litt estimates the coverage ratio at 1.6. But even at the lower level, he isn't concerned about lease defaults. "The
cash flow generated by the facilities is 1.6 times (the amount needed to cover the rent), he said, "So cash flows could drop 10%
and they'd still make their lease payments."
Investors have been further spooked by President Clinton's budget proposal which calls for a cut in the growth rate of Medicare
spending.
"There's a cloud of uncertainty in the healthcare sector," said BancBoston Robertson Stephens analyst Jay Leupp. "And
(Meditrust) has been hurt by the turmoil in the nursing home and healthcare service business."
But both Litt and Leupp believe the market has overreacted to the situation as it pertains to Meditrust.
"Meditrust is an indirect player in the sector" because it owns the real estate, said Leupp. But even if some healthcare tenants
defaulted on leases, he speculates the company would have little trouble finding alternative uses for the properties or new
tenants.
Then there's the company's lodging operations, which focus on the limited service side, where the greatest amount of new
construction has been happening in recent years.
"It's a double whammy .. there's fears about the credit quality of healthcare tenants on one side and fears about overbuilding on
the hotel side," said Leupp.
New construction in this sector has slowed, market watchers said, but plenty is still coming online.
Still, analysts said Meditrust has one ace in this department - a strong brand name, La Quinta. Also many analysts were
encouraged by the company's revenue per available room, or REVPAR, which grew 4% in the quarter and 4.8% in full year
1998. Litt believes the company can achieve 4% REVPAR growth in 1999.
Meditrust will complete construction on 13 new hotels this year, but has no plans for further construction, Benson noted. On the
healthcare side, the company plans to lower new investment in healthcare properties to $200 million in 1999 from $439 million
in 1998.
Donaldson Lufkin Jenrette analyst Larry Raiman said it's "a bumpy time for healthcare REITs" and limited service hotel
companies "have taken a beating." He noted that Meditrust has been making progress with its restructuring, despite the tough
environment, although he cautioned "there are still many moving parts" that investors are waiting to see play out. |
