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STOCKWATCH / Robert Hanley

Health Industry Puts Real Estate Trust in the Pink

September 28, 1986|ROBERT HANLEY

In today's rapidly changing health care industry, acute-care hospital buildings, nursing homes and other capital-intensive structures have often become millstones about the necks of the companies managing them. Many of those companies have been selling their facilities to real estate investment trusts as a means of raising capital and getting debt off the books.

And, as the current tax reform package moves toward becoming law, analysts say stock in many of the health care REITs is becoming more attractive because of the fairly high yields and strong dividend growth--and because it is more liquid than other real estate investments.

One issue that has been getting a lot of attention lately is Health Care Property Investors Inc. of Costa Mesa.

Organized by Los Angeles-based National Medical Enterprises Inc., one of the nation's largest for-profit hospital operators, HCPI went public in May, 1985, with an initial offering of 4.8 million shares at $20. Traded on the New York Stock Exchange, HCPI closed Friday at $29.25 a share, a fairly good return in less than a year and a half.

For hospital management companies, REITs give them one means of laying their hands on new capital without taking on new debt or selling stock. The hospital operator sells its property to the REIT, then leases it back and continues to manage the facilities.

The REITs raise their money through public offerings, using the proceeds for the purchases and passing the lease revenue onto the shareholders in the form of dividends, which, under the current proposal, will be taxed at more favorable rates than in the past.

With an annual dividend of $2.32, the stock's yield on Friday was just over 8%. And Robert A. Frank, a real estate analyst with Baltimore-based Alex Brown & Sons Inc., estimated in a research report earlier this month that HCPI's dividend will grow 6% to 8% a year, boosting the yield even higher.

"Therefore, we expect total annualized return--current yield, plus expected dividend growth--for the stock of about 15%," said Frank, who is recommending that his clients purchase HCPI shares.

During the first half of this year, HCPI's earnings totaled 86 cents per share, but shareholders received dividends of $1.20 a share.

Because accounting rules that subject real estate to depreciation result in paper losses in many cases, analysts say cash flow per share--rather than earnings per share--is the best way to judge a REIT's performance. This forced Merrill Lynch, Pierce, Fenner & Smith Inc. into the curious position earlier this year of having to lower its earnings estimates while hiking dividend estimates for HCPI.

But based on expectations of continued aggressive expansion by HCPI, Merrill Lynch analysts Thomas Kearns and Gary Gordon estimate that cash flow per share will increase 8.5% next year to $2.55 from this year's estimate of $2.35 a share.

Consequently, they said in a recent report, HCPI should become a better buy as the ratio of price to cash flow per share falls to 10.9 from 11.8 in 1986.

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