Health Care REIT Hits 52-Week High on Q2 Results, Buyouts

Zacks Equity Research

Shares of Health Care REIT, Inc. (HCN) scaled a new 52-week high of $66.99 on Aug 27. The stock closed the session at $66.95, reflecting a solid year-to-date return of 30.0%. The trading volume for the session was nearly 0.95 million shares.

Despite scaling such a high, we believe this Zacks Rank #3 (Hold) stock has the potential to move higher; given the improving fundamentals of the healthcare sector, and superior performance of its properties and strategic acquisitions.  

Growth Drivers

Strong second-quarter results, including improved performance of same-store properties, and a series of acquisition news, drove the company’s stock price to the new high.

On Aug 1, 2014, Health Care REIT came out with second-quarter 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, primarily driven by growth in same-store net operating income (:NOI) and notable portfolio investments in premium assets.

Encouragingly, 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 uptick is prompted by solid second-quarter operating results and investment activity, though partly dwarfed by the dispositions guidance rising to $450 million from $250 million.

Recently, the pan-European institutional investor – Patron Capital Partners – shed its Gracewell Health Care business for £153 million (about $257 million). Health Care REIT acquired the 11 premium seniors housing communities of Gracewell Healthcare concentrated in Southern England. On the other hand, Sunrise Senior Living, LLC, which is a management company where Health Care REIT owns 24% stake, purchased Gracewell’s management firm. (Read: Health Care REIT Buys Gracewell Assets, Extends Sunrise Ties.)

Moreover, earlier this month, Health Care REIT announced its plan to acquire HealthLease Properties REIT in a cash deal valued at around $950 million, including debt. This acquisition is in sync with the company’s strategy of expanding its presence in the seniors housing and post-acute care segments.

Further, the company has entered into a partnership agreement with Mainstreet Property Group – the external management company of HealthLease – and plans to shell out as much as $1.4 billion for acquiring development projects under the Next Generation brand, bringing the total potential investment to $2.3 billion. (Read: Health Care REIT to Acquire HealthLease for $950 Million.)

We believe that such strategic portfolio acquisitions would serve as growth drivers for Health Care REIT. While an anticipated rise in interest rate is a concern, aging population and increase in healthcare spending for senior citizens promise solid prospects.
Echoing similar sentiments, the Zacks Consensus Estimate over the last 30 days climbed 1.2% for both 2014 and 2015, to $4.13 and $4.33 per share respectively.

Some Other REIT Stocks to Consider

Investors interested in the REIT industry may also consider stocks like DCT Industrial Trust Inc. (DCT), Extra Space Storage Inc. (EXR) and Omega Healthcare Investors Inc. (OHI). All these stocks hold a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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Read the Full Research Report on OHI
Read the Full Research Report on DCT

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