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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (8745)	10/24/1999 1:58:00 PM
From: Q.	Read Replies (3) \| Respond to of 78634

re. SNH: <<The other half, as you pointed out, is backed by a bunch of publicly traded health care companies trading as penny shares (they were $30 stocks two years ago). So the point Mike has made that you could just write off those tenants and still collect a 9% yield is worth thinking about. >> Does your model, take into account fixed costs? A 50% reduction of revenues would lead to a > 50% reduction in dividends. Most notably among these costs is a substantial amount of bank debt to service. And the interest rate on that debt can rise, too, as the credit worthiness of the borrower diminishes, not to mention the usual exposure to the Fed. Two other things to consider about SNH, in comparison to other REITs: (1) SNH has a higher payout ratio, meaning a larger fraction of its cash flow is used for dividend payments, giving it less room to manuever when something goes wrong. (2) the interests of SNH management are not aligned those of yourself as a shareholder. In contrast, most REITs are self-administered and management holds a large fraction of the shares. Management of SNH is paid a fee according to assets under management, so it has an incentive to leverage up, no matter what it does to you and the risk you take. With REITs in general in a deep funk, there's no reason IMO to shop for junk when you can buy blue-chips at a bargain price. I received SNH shares as a spinoff from HRP, and I sold them for the reasons I have explained. As you say, you can certainly make your own decision, based on whatever reasoning you like. You might not like my argument, but I believe lurkers might benefit from hearing the another side of the story.