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The market for initial public offerings, which has been
decimated by the financial crisis, is finding some relief from
health care REITs. CapitalSource Healthcare REIT will try to
raise $273 million in an IPO this week. Health care REITs raised
$1.6 billion in IPOs between July and September.
NEW YORK, Oct 10 (Reuters) - After two
months of inertia in the U.S. market for initial public offerings, one
health care-related real estate investment trust is aiming to go
public next week.
CapitalSource Healthcare REIT, a
California-based REIT investing primarily in skilled nursing
facilities, will try to raise $273 million despite an IPO market that
has forced company after company in the past few months to either
withdraw their IPOs, or settle for smaller deals.
But CapitalSource seems to be betting
that investors will snap up more shares in health care-related REIT
stocks after a surge of secondary offerings in the third quarter.
Between July and September, health care
REITs raised a total of about $1.6 billion through secondary share
offerings in the United States, according to Thomson Reuters data, as
investors turned to a sector regarded as safer in tumultuous markets.
That total includes a $500 million
follow-on in August by HCP Inc, which on its own was larger than all
IPO proceeds in all sectors in the third quarter.
According to the FTSE NAREIT US Real
Estate Index, health care REITs, 11 of which are in the index, have
seen total returns, which include price returns and dividend yields,
fall about 14 percent, while REITs overall are down about 30 percent
so far this year. In contrast, the S&P500 is down about 39 percent.
But until this week's market collapse,
health care REIT returns were about neutral for the year, and up 24
percent year over year.
"When there is uncertainty in the
economy and fundamentals look worse for other sectors, then health
care looks very appealing, so prices are bid up," said Rosemary Pugh,
a senior associate specializing in health care REITs at Green Street
Advisors. The success of secondary offerings whets the appetite for
IPOs as well, she said.
A REIT is a property company that in
exchange for distributing at least 90 percent of its taxable income to
its shareholders pays no corporate taxes on most of its income.
The fourth quarter seems poised for
health care REITs to remain popular if markets stabilize. Last week,
health care REIT BioMed Realty Trust sold $187 million in additional
shares.
"With health care stocks doing so well,
they should be doing equity offerings when they can raise equity at an
appealing price," said Pugh.
DEFENSIVE STOCKS
The nature of the leases on the
properties owned by health care REITs makes them defensive stocks in a
down market, analysts said.
"The long-term leases, tenants being
responsible for upkeep and the annual rent bumps gives the companies
very steady earnings," said Tayo Okusanya, an analyst with UBS
Securities LLC."
And nursing homes and hospitals are
less vulnerable to sharp real estate corrections.
"For regular REITs, people are afraid
the underlying value of real estate will fall, but that is not the
case for health care REITs," Pugh said.
LOOMING THREATS
Health care REITs have not only been
drawn to the equities markets because of the good valuations they
could command, analysts said.
"They were companies that relied pretty
much exclusively on debt and suddenly found themselves without access
to capital,' said Ben Holmes, publisher of Morningnotes.com, an IPO
advisory firm. But because they are "good diversification plays" for
investors in market downturns, they could quickly fall out of favor if
the economy perks up.
"In an uncertain economy, they tend to
outperform other stocks. If all of a sudden, there's a feeling the
economy is going to get better, you'll see asset allocation away from
these stocks," said Okusanya.
The presidential election is being
watched closely by investors because of how reliant skilled nursing
facilities and hospitals are on government reimbursements, he said.
"If you see Medicare or Medicaid come
under attack by a new president, that would be a negative," said
Okusanya.
But with markets down so sharply, even
health care REITs might not get a fair shake from investors.
In addition to CapitalSource, Aviv
REIT, a Chicago-based health care REIT, has also filed for a $200
million IPO and is believed by analysts to be waiting in the wings.
The last health care REIT to go public
was New York-based Care Investment Trust Inc in June 2007. Since then,
they are down 34 percent from the offer price.
"We have no way of formulating an
accurate perspective until we get through this period," Holmes said.
Still, health care REITs are likely to
remain compelling for now. "They are one of the few places you can
hide," Okusanya said.
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