Grim Prognosis at Meditrust

One of the health care REIT's major shareholders is selling its 10 million-share stake.
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News that the opulent Bass family has registered for sale its 10 million-share stake in

Meditrust

(MT) - Get Report

is just the latest confirmation that the once highflying health care REIT has landed in the intensive care unit.

In a

Securities and Exchange Commission

filing today, the company registered 10.9 million common shares from current stockholders, including the Bass holdings. The news comes on the heels of Meditrust's announcement that it is suspending the common stock dividend and selling its health care assets to focus on the lodging business under its

LaQuinta Inns

flag.

The registration serves as further evidence to analysts that Meditrust is on investors' critical list. "Would you buy stock in a company when the largest shareholders are looking at selling their shares at the bottom?" asks Michael Mueller of

Donaldson Lufkin & Jenrette

. "If they believed in the story, you would think they would hold on, wait and see." In response to the dividend cut and asset sales, DLJ downgraded Meditrust to under perform.

The company's filing notes the shares were registered after a sales restriction expired on the Bass holdings. While a registration allows the shares to be sold, it does not require a sale. The company would not comment about the disposition of the shares.

Meditrust's silence on the filing led one REIT fund manager to suggest the worst: "The registration signals

the Bass family knows something and it isn't good."

In its announcement late last Friday, Meditrust insisted the reorganization plan, which includes the dividend cut and asset sales, will cure the company's chronic under performance. However, second opinions suggest the company's plan amounts to ineffective triage which will only temporarily stop the bleeding. Meditrust stock slid nearly 50% on the company's announcement and

Moody's

and

Standard & Poor's

placed the company's debt ratings under review for downgrades.

While the company had little choice but to terminate the dividend, the 30%-plus yield was the stock's only remaining attraction. With $210 million in debt maturing this year and $1.4 billion maturing next year, the company needs every dime it can find. Still, analysts question whether Meditrust can be saved. "While these painful steps may be the correct moves over the long run, near-execution risk certainly exists," says DLJ's Mueller.

The risk rests with Meditrust's ability to sell its health care properties at attractive prices in a very difficult market. Recent bankruptcies of health care operators like

Vencor

(VCRI)

,

Sun Healthcare Group

(SHGE)

,

Mariner Post-Acute Network

(MPANE)

and

Integrated Health Services

(IHSV)

make the sale of properties occupied by these operators problematic. "While the

operator bankruptcies don't directly threaten Meditrust, they further erode investor sentiment toward health care REITs and property values," says

Sutro & Co's

Craig Silvers. Silvers downgraded the stock to "source of funds." Neither Sutro nor DLJ have done underwriting for Meditrust.

Take, for example, Meditrust's sale this week of 33 properties -- mostly medical office buildings -- for $204 million, including $63 million in assumed debt and securities. "It's hard to tell whether the sale was profitable or not," says Silvers. "In any case, it wasn't a big winner."

While some may suggest this week's sale shows Meditrust is able to shed assets, the medical-office-building portfolio was likely one of the easier sales the company will face. Lease rates from multitenant medical office buildings tend to be more stable than those from inpatient facilities, which are more dependant on insurance reimbursement pressured by government reforms.

"Medical-office-building risks are more similar to professional office properties than

to medical facilities," says DLJ's Mueller. "It will be much more difficult for Meditrust to sell skilled-nursing and assisted-living assets in this environment at above 'fire-sale' prices." As the cost of capital continues to increase for REITs, the number of potential buyers is shrinking, something Mueller believes may force Meditrust to sell properties at a loss to meet liquidity needs.

Others say Mueller's view is optimistic and believe the company is on the brink of insolvency. "Its hard to tell what these assets are really worth," says the REIT fund manager, who thinks the company's illness may be terminal. "At some point, they'll probably have to file for bankruptcy just to keep creditors at a distance."

In a news release, the company said it would not have additional comment on asset sales until the sales are completed. Today, the company referred calls to an outside public relations firm which would not comment further.

Compounding the problems, Meditrust President and CEO David Benson abruptly resigned last week. His departure was pricey: He will receive a severance package including nearly $9 million in cash and continued benefits for five years. That's in addition to a $25 million payment to former CEO Abe Gosman less than two years ago. "How can I get this deal?" quips Sutro's Silvers. Shareholders are likely to take a dim view of the dividend cut and generous payouts to executives whose value was questionable.

So, what if Meditrust is able to sell its medical properties, meet its debt obligations and is left with the lodging business? While opinions are mixed, analysts generally aren't excited about the prospects. "We agree with the assessment that the lodging business has considerable upside potential," says Silvers. "However, we may first see more downside and believe the risk of further deterioration currently outweighs potential from a lodging recovery."

The fund manager is more concise. "From all of this they are left with LaQuinta as their only asset. That should make investors weary. It does me."

Not exactly a clean bill of health.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.