The other 50% of assets are healtcare offices, nursing homes, and assisted living centers. Although the government has reduced medicare payments to nursing homes causing some financial problems fo0r some nursing home teneants, everybody is still able to pay the rent. Sun which rents 8% of Meditrusts assets has the most severe problems and has had to seek bankrupty protection, but they are still paying and the leases have been written so that everything is crosscollateralized and Meditrust has a plan to continue operating these facilities should Sun defaul. Obviously Sun doesn't want to go under and they will probably cut expenses to the bone or try to renegotiate thier leases before defaulting altogether. Also with the strong elderly lobby in this country Congress may eventually have to change their policy if it became known to the public that they were putting nursing homes out of buisiness. The demographics of the U.S. population show a trend toward exploding numbers of elderly people who will need the services of nursing homes, assisted living centers, and healthcare offices. Although out of favor now, longterm I think these will be some of the most stable and profitable commercial properties to own. They are still longterm stable tenants in an economic downturn. Old people dont disspear when the economy goes bad. Id rather rent a nursing home in a recession than an office building full of law offices and internet companies that have been losing money for the last 10 years. Looking at the share price/book value value of less than .5 I'm able to buy commercial real estate for less than half price and get a return of 25% with high asset growth potential, some diversification and much less risk than I would probably be taking if I bought a commercial office building myself.Not only do I get 25%, but I have none of the headaches normally associated with owning commercial property such as beating rent out of tenants, filling vacancies, trying to get refinanced myself and enless maitenance hassles. My 25% return is after I've payed professional manangers to take care of everything. In addition if I want out rather than getting involved with real estate agents and listing my property for a year paying enless fees and hoping someone will get me out of this hassle someday by buying my property I just go online enter an order in my brokerage account and in a few minutes my capital has been returned to my brokerage account. As much growth as I think there is in the internet its hard for me to imagine that if I paid $100/share for amazon.com any point within my lifetime when that share would produce an annual dividend of $25. Even if every man woman and child read 3 books a day and bought them from amazon I don't think it would be possible and frankly I think internet stocks are alot more risky that Meditrust. If you're worried about risk in the REIT sector there are a number of REITS similar to Meditrust, such as HRP and ENN that have been unfairly valued and are paying huge dividends. Just diversify by buying several and then if something happens to one of them its not the end of the world. I think people who paid $30/share for meditrust who are dumping it for $6.50/share must be out of their mind, but there's always a sneaking suspicion that I'm missimg something. It just seems like too good of a deal If you know what I'm missing I'd love to hesr from you.
1) Capital gains add to the REIT's income (per IRS) and thereby increase the minimum dividend payout (the 95%). Ultimately, the shareholders pay the tax. (Correct me if I am wrong, anyone.)
2) About half of MT's debt is at fixed rates, so the impact of higher market interest rates would be less drastic than your calculations show.
My opinion: You are looking at a company with a breakup value of about $12 per share. In other words, if MT took the next 2 years to sell off all of the properties and pay off all of the debt, that's what the shareholders will receive in liquidation. The chance of bankruptcy is remote, IMO. The dividend will probably be cut -- my guess is by 25% -- to conserve cash and improve refinancing prospects. Higher medicare payments will bolster operators and also improve prospects for financing healthcare facilities. Hotel supply/demand will come into balance -- the main risk here is that equilibrium is delayed by a recession -- something that no one (except Ed Yardeni) expects right now.
If we are not at the bottom, we are mighty close to it. (JMHO, but then again, I've been wrong on MT so far.)
If MT sold La Quinta it would receive 7.6 x EBIDTA based on Red Roofs recent selling price (see Frichards newswire story from a few days ago). The EBIDTA for the last 3 quarters has averaged %75 million, which annualizes to $300 million. 7.6 x $300 million = $2.28 billion.
If MT used the $2.28 billion to pay off its current debt, it would still owe approx. $350 million to the lenders.
The EBIDTA on the medical facilities is currently $280 million. Subtract out operating expenses of $25 million and interest payments of $35 million on the remaining $350 million of debt, and you're left with net income of $220 million.
At $12 per share, MT is worth $141 million x $12 = $1.7 billion.
Your assumption is that MT is only worth 7.7 x net income = 12.9% return on investment annually.
Real estate that provides a 12.9% net return on investment and in addition provides tax shelter through depreciation and appreciation is a steal.