Despite some institutional investors’ recent move out of the REIT market, two specialty REITs have turned in impressive third-quarter results. And though it does not show in their stock prices, the fundamentals for these health care REITs remain strong.

Health Care REIT, Inc., (NYSE:HCN) landed record quarterly funds from operations of 66 cents per diluted share, 11 percent more than the same period in 1997. This boosted the REIT’s funds from operations for the first nine months to $1.91 per diluted share, an increase of more than 10 percent over last year.

The strong third-quarter results brought with them a 55.5-cent per share dividend for the quarter.

Just days earlier, American Health Properties Inc. declared a 54.5-cent dividend for the third quarter on its Core Group Common Stock (NYSE:AHE).

American Health’s Core Group saw third-quarter funds from operations of 65 cents per share, a 5 percent gain over third-quarter 1997.

The market gave a small thumbs-up to the two REITs, each of which saw what could be a dead-cat bounce in stock price shortly after announcing their quarterly results.

American Health’s stock price, which in February rose to its year-to-date high of $29, had fallen as low as $19 7/8 in the second week of October -- a time some analysts see as, and pray was, the bottom of the REIT market. The stock has since wended its way to a sale price of $23 11/16. While this is significantly higher than the price quoted just weeks ago, it remains low for the stock’s strong 13.39 price/earnings ratio.

Health Care REIT, based in Toledo, Ohio, also carries a strong price/earnings ratio at 10.62. After bottoming out at $20 per share in the wiles of the early October market, Health Care REIT has bounced to $23 ¼. This result remains significantly lower tan the late January high of $29 1/4, and it mirrors the approximate 25 percent loss in REIT stocks overall this year.

"The company's fundamentals are excellent," said George Chapman, chairman and chief executive office of Health Care. "We expect to capitalize on current market conditions, which are generating attractive, high-yielding investment opportunities for the health care REIT sector."

Ed Lange, Health Care REIT’s chief financial officer, said the REIT’s decreased stock price could largely be pinned on the sale of 2.5 million shares of stock in early October.

"Out stock did not suffer much in the way of downward pressure like our competition, so we were able to go out and issue shares," Lange said. "The aftermarket has been soft, so the price has not recovered after the stock offering."

Lange added that all health care REITs would have to prove to Wall Street that they can access capital to fund their growth. Health care REITs depend upon external growth to grow funds from operations, and they act more like finance companies than property managers.

The question used to be whether health care REITs could compete with other REITs and grow, Lange said. Health Care REIT answered that question by making new investments of $262 million in 1997 and $286 million so far in 1998.

"Now, all of a sudden, the concern has switched," he said. "Can we access capital to fund the growth?"

American Health and Health Care REIT both specialize in health care facility investments. Almost half of Health Care REIT’s investments are in assisted-living facilities, while about a third of the REIT’s monies are invested in nursing homes. The REIT also has investments in specialty-care hospitals and retirement centers for more active people.

Health Care REIT owns and leases property, finances mortgages, and finances construction for nearly 50 health care operators at more than 200 facilities in 33 states, including Florida, Massachusetts, North Carolina, and Texas. Health Care REIT has subsidiaries in Pennsylvania and Texas.

American Health’s Core Group consists of investments in acute care hospitals, rehabilitation hospitals, long-term acute care hospitals, assisted living facilities, skilled nursing facilities, Alzheimer's care facilities and medical office/clinic facilities. These facilities are geographically diverse, located in 21 states.

Published: October 27, 1998

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