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La Quinta Properties Inc. (LQI) Message Board

  • hsabobo hsabobo Nov 7, 1999 8:44 PM Flag

    series of four 3

    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.

    • Just 2 comments on what you wrote.

      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.)

      • 1 Reply to Vaalie60
      • 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.

        Therefore, MT must be worth more
        than $12.