Health Care REIT Beats FFO Estimates by a Nickel, Ups View

Zacks

Health Care REIT Inc. (HCN), a real estate investment trust (:REIT), reported second-quarter 2014 normalized funds from operations (:FFO) of $1.06 per share, a nickel ahead of the Zacks Consensus Estimate and up 13 cents year over year.

The 14% year-over-year increase in normalized FFO per share is primarily driven by same-store net operating income (:NOI) growth and notable portfolio investments in premium assets. Based on these factors, the company has also increased its 2014 outlook.

Moreover, normalized funds available for distribution (FAD) stood at 94 cents per share, up from 82 cents per share in the year-ago period.

Total revenue escalated 21.8% year over year to $826.4 million and exceeded the Zacks Consensus Estimate of $818 million.

Inside the Headlines

In the second quarter, same-store NOI increased 4.4% from the year-ago period, driven by 7.7% year-over-year rise in the seniors housing operating portfolio.

Health Care REIT concluded gross investments worth $579 million in the quarter under review. This comprised of, $455 million in acquisitions, $44 million in development funding, $76 million in loan advances as well as $4 million in capital improvements.

Notably, the second quarter acquisitions comprised of ten medical office buildings, a post-acute asset operated by Genesis, a seniors housing operating property managed by Revera as well as eight seniors housing triple-net properties operated by existing partners.

Health Care REIT exited the second quarter with cash and cash equivalents of $207.4 million, down from $512.5 million as of Jun 30, 2013. Moreover, recently, the company closed on a new $3.23 billion unsecured credit facility. With this expanded, extended and lower-priced facility the company could enhance its financial flexibility and capital access.

2014 Outlook Raised

Health Care REIT increased its full year 2014 normalized FFO per share guidance range to $4.05–$4.15 from $4.03–$4.13 guided earlier, denoting a 6%–9% increase from 2013. The Zacks Consensus Estimate of $4.07 also lies within the newly guided range. The uptick in outlook is prompted by solid second-quarter operating results and investment activity, partly dwarfed by a rise in dispositions guidance to $450 million from $250 million.
 
Also, the company raised its normalized FAD per share outlook range to $3.57–$3.67 from the previous range of $3.55–$3.65.

Dividend

Health Care REIT’s board of directors, declared a quarterly cash dividend of 79.5 cents per share, marking a rise of 4% over the year-ago dividend of 76.5 cents. This marked the company’s 173rd consecutive quarterly dividend payment. It will be paid on Aug 20, 2014, to stockholders of record as on Aug 11.

In Conclusion

Health Care REIT’s better-than-expected result, on the back of notable operating portfolio performance, is encouraging. Going forward, we believe that the strategic portfolio restructuring activities and enhanced financial flexibility bodes well for its growth. In addition, rise in senior citizen spending for healthcare reasons promises strong prospects in the future. Also, the guidance increase boosts shareholder confidence. However, an anticipated rise in interest rate and intense competition remain pressing concerns.

Health Care REIT currently carries a Zacks Rank #3 (Hold). We now look forward to the following stocks like HCP Inc. (HCP), Ventas Inc. (VTR) and Vornado Realty Trust (VNO), which are scheduled to release in the next fortnight. All of these stocks carry a Zacks Rank #2 (Buy).

Note: 1. FFO, a widely accepted and reported measure of the performance of REITs, is derived by adding depreciation, amortization and other non-cash expenses to net income.

2. FAD, a measure to ascertain the ability of REITs to generate cash, is derived by subtracting straight-line rent and non-recurring real estate expenses from funds from operations.

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