Health Care's FFO Meets, Revs Up

Zacks

Health Care REIT Inc. (HCN), which operates senior housing and health care real estate, reported fourth quarter 2012 normalized FFO (funds from operations) of 85 cents per share, in line with the Zacks Consensus Estimate. However, this was lower than the year-ago FFO of 91 cents. The decrease in year-over-year FFO per share was primarily attributable to increased number of outstanding shares in the reported quarter.

For full year 2012, the company’s normalized FFO came in at $3.52 per share, exceeding the Zacks Consensus Estimate by 3 cents and was significantly ahead of the year-ago figure of $3.41 per share.

Funds available for distribution (FAD) in the reported quarter stood at $192.4 million or 74 cents per share compared with $149.0 million or 80 cents per share in the year-ago period. For 2012, FAD was recorded at $703.3 million or $3.11 per share compared with $524.0 million or $3.00 per share in 2011.

Behind the Headlines

Total revenue reached $500.7 million, escalating 30.2% year over year. The figure also exceeded the Zacks Consensus Estimate of $489 million. Total revenue for full-year 2012, came in at $1.82 billion, surging 37% from a year ago and was marginally ahead of the Zacks Consensus Estimate of $1.81 billion.

Total same-store cash NOI (net operating income) increased 4% from the year-ago period. This included an 8.6% rise in the senior housing operating portfolio.

Sunrise Senior Living Acquisition Update

Health Care REIT has now completed the acquisition of the Sunrise property portfolio, the divesture of the Sunrise management company and the acceleration of all planned joint ventures (:JV).

Prior to the culmination of Sunrise property portfolio acquisition, the affiliates of investment firms Kohlberg Kravis Roberts & Co. (KKR) and Beecken Petty O’Keefe & Company acquired the divested management company business for $130 million. Notably, Health Care REIT invested about $26 million for a 20% ownership stake in the JV.

Health Care REIT’s current investment in Sunrise properties is $3.5 billion and it expects the investment to increase to $4.3 billion by Jul 2013, subject to exercising of its rights to acquire additional JV partner interests at favorable fixed purchase prices. It expects to make $4.3 billion worth investment in 120 wholly-owned properties and 5 JV properties. The properties are located in high-barriers-to-entry markets such as London, Southern California, Chicago, Philadelphia, Boston, Washington D.C. and Montreal. Health Care REIT anticipates the acquisition to generate an unlevered initial yield of 6.5% or 6.1% after capital expenditures.

Investments

During the quarter under review, Health Care REIT made gross new investments of $2.0 billion. For 2012, it completed gross new investments of $4.9 billion.

During the quarter, the company made $1.6 billion worth of investments in senior housing operating portfolio, including $1.1 billion worth of acquisitions at a blended yield of 6.5% and $581 million of loans. The acquisitions comprise purchase of 11 properties with Belmont Village for $530 million, 11 properties from Brookdale Senior Living Inc. (BKD) for $271 million and five properties from Sunrise Senior Living for $265 million.

Also, Health Care REIT concluded investments worth $115 million in seniors housing triple-net lease portfolio at a blended yield of 8.0%. The investments included the acquisitions of 2 properties worth $52 million, at a blended yield of 7.3%. As well, the company finished 5 development projects worth $63 million at a blended yield of 8.5% during the fourth quarter.

Additionally, Health Care REIT made about $267 million investments in medical office buildings (MOBs) at a blended yield of 7.3%. These include the purchase of 11 MOBs (average occupancy of 96%) spanning 718,000 rentable square feet in aggregate and 2 development completion (312,000 rentable square feet, 94% leased).

Liquidity

At the end of the year, Health Care REIT had cash and cash equivalents of $1.03 billion.

Dividend

Health Care REIT paid a quarterly dividend of 76.5 cents to its shareholders on Feb 20. This marked the 167th consecutive quarterly dividend payment. Notably, the fourth quarter 2012 dividend marked a 3.4% increase over the year-ago dividend of 74 cents.

2013 Outlook

For full year 2013, Health Care REIT expects normalized FFO in a range of $3.70–$3.80 per share.  Also, it expects normalized FAD in a range of $3.25– $3.35 per share. Both the guidance represented an increase of 5%–8% over the 2012 reported figures.

Our Take

We are encouraged with the decent results at Health Care REIT. Being one of the largest and oldest healthcare REITs in the U.S, the company boasts a strong portfolio of senior housing, long-term care and medical office facilities. Moreover, the completion of Sunrise Senior Living facility acquisition further boosted the company’s high-quality senior housing portfolio and extended its reach in the high-barriers-to-entry affluent markets.

Also, the healthcare sector is relatively immune to the downturn in the economy and provides a steady source of income that insulates the company from short-term market volatility. Thus, we expect Health Care REIT to maintain its growth curves through strategic investments and simultaneously benefit the shareholders by raising dividends.

Health Care REIT currently holds a Zacks Rank #3 (Hold). One of the better performing REITs is Ventas Inc. (VTR), which carries 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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