Generally most like the idea of a REIT exept for one critical thing, the need for outside capital. It's fine when you adding 10-20% new business in a year like many other REIT's, it can be a problem when your doubling your business and spending your net worth in a year like PZN. This has been a perceived problem with PZN too. The "problem" can be self-filling. If your blended(debt and equity)cost of capital is 12% and your share price drops, this increases your costs and lowers your profit margin. So the analysts start lowering their estimates to cover the higher cost. Investors see lower estimates and the cycle continues. It sounds simple to stop but if the REIT's profit margins are the usual 4-5% they go from having a growth component to zip.
I think Congress is starting to get the message, it's very difficult to run a very capital intensive business this way. They MUST loosen up the retained earnings aspect of the business if they want REIT's to survive, IMO.
What people are forgetting that the way things are going, PZN and CCA could hit "normal" ratios, to be combined REIT, in the distant future and not have to have an "Opco". Wouldn't that blow everyone away? But the laws are pointing that way.
The key will be getting through the next 12 months for PZN, IMO. If we can get the stock back north of $15 then new equity shares are in the solidly accertive zone. By mid 2000 there will be enough beds on line to be producing 20% more cash flow. The new fees will begin to drop as a percent of revenue. By 2001, IMO , cash flow numbers will really be hitting full steam.
This company is not going belly-up. They are in a strong growth mode and the REIT guys are like a deer in the headlights, IMO. Unfortunately they do have a effect here, they can certainly put a large damper on raising outside capital. And here I do agree with the bears, sometimes you have to shallow hard and kiss a few rear ends for the good of the company. If DOc can not do it, they need someone who can. Not that I blame him.
The price of the stock has no impact on the profit margin.The price of the stock does have a significant impact on the ability to grow equity, as any new stock issue will be dilutive to the extent the stock price is less than book value, and hence not in the shareholders interest. Aside from equity the only other way to raise capitalization is by debt, which PZN is now attempting. In the event PZN is not successful then the only growth in ffo is from managment and enhancement of exisitng assets. It appears to me that debt service coverage is adequate (3-1) and that the company's ffo relative to the stock price is a bargain even if there is no or diminished growth in revenues. Basically the company is selling at about 5 times cash flow. I'd take that even with no prospects for growth.