LTC Puts Trust in Nursing Homes : Real estate: In a friendlier environment for REITs, the Oxnard-based enterprise has just raised $142 million by going public.

“REIT.” The mere mention of real estate investment trusts can send many investors scurrying, given how many REITs went sour in the 1970s and ‘80s.

But in the past two years some REITs have performed well, particularly those investing in health care properties.

So in that friendlier environment, a newly organized REIT named LTC Properties Inc., which is investing in nursing homes, has just raised $142 million by going public.

LTC, which also just moved its headquarters to Oxnard from Fort Smith, Ark., sold equal parts common stock and convertible debt in its public offering. The stock portion included 7.5 million shares priced at $10 apiece.

The trust then promptly plowed $78 million of the proceeds into 16 partnerships that own and lease to various operators 41 nursing homes in 10 states.

The investments, in the form of 10- to 12-year mortgage loans, enabled the partnerships to refinance their existing mortgages.

LTC’s management is led by Chairman Andre C. Dimitriadis and President William McBride III, both former executives of Beverly Enterprises Inc., the nation’s largest operator of nursing homes.

Until they left Beverly earlier this year, Dimitriadis, 51, had been Beverly’s executive vice president and chief financial officer since October, 1989, and McBride, 32, had been the company’s vice president and controller since April, 1988. Both are credited with helping to bolster Beverly, which is also based in Fort Smith, after its rapid expansion in the mid-1980s nearly sank the company in 1987-88.

They formed LTC (short for “long-term care”) because “there’s a tremendous need for financing” in the nursing-home industry, Dimitriadis said. “The banks were never too comfortable with this kind of financing,” so LTC will be able to step in and make loans available, he added.

A real estate investment trust is effectively a real estate mutual fund. REITs pool investors’ cash and invest in either the equity or mortgages of properties.

And as long as they pass along most of their earnings to their stockholders, those earnings are exempt from federal income taxes. (Their individual investors still face a tax liability on their gains, of course.)

LTC plans to pay an annual $1-a-share distribution, or dividend, to its shareholders which would give the stock a 10% taxable yield based on LTC’s initial offering price of $10 a share.

It’s that kind of yield--at a time when many fixed-income investments pay 7% or less per year--that are making health care REITs so attractive to investors. (The stock closed Monday at $10.38 a share in New York Stock Exchange composite trading, pushing the current effective yield down to 9.6%.)

Health care REITS, notably those involved with nursing homes, have been strong recently because health care costs, and revenues for health care operators, have been rising faster than general inflation, said Catherine C. Creswell, an analyst with the investment firm Alex. Brown & Sons Inc. in Baltimore.

Also, the nation’s aging population is lifting demand for nursing home care. Demand also is getting a boost from nursing homes’ own efforts to increase their services beyond mere room and board, such as providing certain drugs and physical therapies, Creswell said.

“Nursing homes are attractive because they can provide these services and provide them at a lower cost than an acute-care hospital,” she said.

She also noted that REITs are providing financing that nursing homes wouldn’t otherwise have access to, but added that the building of new nursing homes is still minimal. That’s enabling occupancy rates to stay high in existing homes, allowing home operators to maintain or raise rents.

Perhaps most importantly, McBride said the reimbursement that nursing homes are getting from state and federal programs, notably Medicaid, has risen the past two years, which has helped the nursing home industry recover from its poor showing in the late 1980s.

Of course, a REIT is only as good as the properties it invests in. For instance, Mortgage & Realty Trust, a major REIT with executive offices in Burbank and Pennsylvania, had to reorganize under the federal bankruptcy laws in 1990 because of high defaults in its portfolio of investments to offices, industrial buildings and other commercial real estate.

For LTC, one question now is what the trust will do with the other $64 million it raised from its initial public offering, cash that is being temporarily invested in short-term time deposits until LTC’s executives decide where to put it. That question is one of the risks that LTC’s new stockholders have to bear.

“There you’re betting on the new management” and its ability to find credit-worthy borrowers, said Michael Kirby, who follows health care REITs for the investment firm Green Street Advisors Inc. in Newport Beach.

Most of the $78 million that LTC initially loaned went to partnerships controlled by two Chicago-area men, Zev Karkomi and Harvey J. Angell. Why them? Dimitriadis said National Westminster Bank PLC, a British bank that managed LTC’s initial public stock offering, knew of Karkomi’s and Angell’s desire to refinance their nursing home mortgages and so mated them with LTC.

But Dimitriadis said he had already known Karkomi and Angell as leaders in the nursing home business. “We felt very highly of them,” Dimitriadis said. “They pay their bills on time.”

There’s also the risk for LTC’s investors that if interest rates rise, the attractiveness of LTC’s stock could fade.

Dimitriadis said that, indeed, if rates on 10-year Treasury notes were to jump to 10% from their current 6.5%, “clearly our 10% yield would be less attractive” because Treasurys are risk-free. “But to the extent you believe that we’ll continue to be successful, our dividend will keep going up,” he said.

And to help make LTC’s initial public offering palatable to investors, Dimitriadis and McBride agreed to temporarily delay their respective $150,000 and $100,000 annual salaries until LTC’s own operations generate enough cash flow to cover the $1-a-share dividend.

“We want to make sure the dividend is produced properly,” Dimitriadis said. How long will that take? The pair won’t predict.

But they won’t go begging in the meantime. The employment contracts of Dimitriadis and McBride also entitle them to 200,000 shares and 100,000 shares, respectively, of LTC common stock that’s payable in four installments ending in 1997. At the initial offering price, the executive’s stock carries a total market value of $3 million--not to mention its 10% dividend yield.