Nursing homes and Wall Street.

Nursing Home Stocks Recover

The continuing rise in the stock market during July, fueled in major part by lower interest rates, and absence of inflationary signals, caused nursing home stocks to reach new highs. Health Care and Retirement Corp. (HCR) rose more than 20% in the past month to a new high since it went public at $20 per share. Horizon Health Care was $6 per share in June and is now $9. We reported the misunderstanding concerning earnings in our last column, and now investors are valuing the stock on its fundamentals. Living Centers of America also recovered, but is still below the price reached in February. National Health Corp. and Providence Health Care continued to be weak. Providence was hurt by some uncertainty regarding full-year earnings. However, reduced interest expense and higher occupancy rates will buoy earnings and the stock should recover to its issue price.

Merrill Lynch and Kemper Securities are beginning to highlight the long-term health care stocks in its coverage. Merrill Lynch has recently issued a "Buy" recommendation on Horizon Health Care, and undoubtedly this report helped the stock in recent days. Kemper has been discussing the health care REITS as important yield vehicles. Merrill emphasizes Horizon's regional concentration in the midwest and the southwest. Currently, it has 61 long-term care centers with over 6,200 beds. In addition, the Merrill Lynch analyst highlights its diversification into sub-acute care and pharmacy operations. Merrill Lynch is looking for a 20% to 25% annual growth rate in earnings in the next five years.

The REITS Are

Roaring

With short-term money market rates at 3.5%, investors with maturing bonds or other yield vehicles are beginning to examine yield stocks. Thus, several brokerages are recommending utilities, some energy stocks and also health care REITS. In the nursing home field, there are four major issues as shown in the table below. The highest yield is available from Health Care and Retirement Properties Trust (HRP), with a yield of 10.4%. Health Equity Properties (EQP) yields 10% at the indicated dividend. Health Care REIT and MEDITRUST also have attractive yields. With a stock yielding close to 10%, a relatively small move in the stock such as 10%, would result in a 20% total return (dividend plus capital appreciation), which may draw increasing investor interest in these relatively predictable cash flow companies. High yields and some appreciation helped the telephone stocks in the mid-1980s.

A variation of high yielding REITS is National Health Investors, Inc. (NHI) which issued 10% senior convertible debentures. The size of the issue was $110 million, raised in October, 1991. The debentures are convertible into common stock at $20 per share. The current price of NHI is $24 per share. The company owns 40 health care centers and three retirement centers, operated by a related company, National Healthcorp L.P. (NHC). In addition, NHI also holds mortgages on $101 million on various health care properties, mainly first mortgages of nursing homes.

Living Centers of America Shows

Strong Third Quarter Advance

Living Centers of America reported third quarter earnings at $0.33 per share, up from $0.24 per share a year ago, a 40% increase. The results reflect elimination of previously divested centers and the effects of the recent IPO, including the restatement of interest. About one-half of the increase in the quarter reflects rate increases, including those under OBRA. Also, occupancy rates rose as did private pay residents.

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Arthur M. Stupay is a well-known investment analyst and banker. He was chosen by Institutional Investor magazine as a member of its All-American Team of Analysts for 15 consecutive years.