RBC upgrades Medical Facilities to “outperform”

RBC Capital Markets has upgraded its rating of Medical Facilities (TSX: DR.UN) to “outperform” and increased its 12-month price target to $10.00 from $9.50.  

The units finished trading at $8.44 yesterday.

Medical Facilities owns controlling interests in four specialty surgical hospitals, located in South Dakota and Oklahoma, as well as two ambulatory surgery centers in California.

“We believe the worst of potential US healthcare reform has been discounted into the unit price,” writes analyst Doug Miehm.

Indeed, based on the specialty hospital healthcare reform that has come to light so far, he contends that the impact on Medical Facilities “will be manageable and could ultimately play into the company’s strategy.”

“While the potential limitations on the formation of new specialty hospitals or expansions at existing hospitals put a damper on the outlook to a degree, the recent 2009 capex should permit growth for several years and future acquisitions could be easier,” reasons Mr. Miehm.

Perhaps most importantly, he believes Medical Facilities’ ~13% distribution is safe.  Plus there aren’t any dramatic changes in tax treatment coming in 2011, because Medical Facilities isn’t actually an income trust.  Rather, it’s an income participating security or IPS – a common share and a high-yield bond fused together – where only interest and dividends are being paid to unit holders.  While income trusts – paying out a combination of fully taxable business income, dividends and a tax-deferred return of capital – will be forced to convert to corporations in 2011, there are no such plans on the horizon for IPSs.