Health Care REIT Inc. (HCN), a real estate investment trust (REIT), which operates senior housing and health care real estate, reported second-quarter 2013 normalized FFO (funds from operations) of 93 cents per share, a cent ahead of the Zacks Consensus Estimate and up 4 cents year over year.
The improved results were primarily attributable to better-than-expected revenue growth. Alongside, the company registered decent same-store NOI.
Funds available for distribution (FAD) in the reported quarter stood at 82 cents per share compared with 79 cents per share in the year-ago period.
Behind the Headlines
Total revenue reached $682.1 million, escalating 55.5% year over year. The figure also exceeded the Zacks Consensus Estimate of $655 million. Total same-store cash NOI (net operating income) increased 3.8% from the year-ago period. This included an 8.4% rise in the seniors housing operating portfolio. The company increased its private pay mix to 82% in the reported quarter from 74% in the year-ago quarter.
Sunrise Acquisition
On Jul 1, 2013, Health Care REIT accomplished the buyout of the last phase of the Sunrise Senior Living property portfolio worth $745.2 million. In total, $4.3 billion of investment was made that brought on board 120 wholly-owned properties and five properties owned in joint ventures with third parties.
The properties are located in markets with high concentrations of age and income-qualified elderly including such as London, Southern California, Chicago, Philadelphia, Boston, Washington D.C. and Montreal. In the second half of 2013, unlevered NOI yield from this portfolio is projected to exceed 6.5%, according to the company.
Investments
During the quarter under review, Health Care REIT accomplished gross new investments of $1.5 billion. It broadened its international portfolio by entering into a $1.3 billion partnership with Revera Inc. to own 47 high-quality seniors housing and care communities with around 5,000 units that are positioned in key metropolitan markets in Canada.
Following the deal closure, Health Care REIT now has a 75% interest in the portfolio while the rest of the interest is owned by Revera. The portfolio is projected to generate an initial unlevered NOI yield of 7%.
Subsequent to the quarter end, the company also made a $213 million investment in the U.K. with Avery Healthcare. The portfolio comprises 14 seniors housing communities with 940 beds in the U.K.
On the other hand, Health Care REIT reaped proceeds of $366 million on dispositions in the first half of 2013. This led to $52 million in gains.
Liquidity
Health Care REIT exited the quarter with cash and cash equivalents of $512.5 million, compared with $204.9 million as of the prior-year quarter end. The company generated $1.7 billion of proceeds in May through the issuance of 23 million shares of common stock.
Outlook Reaffirmed
For full-year 2013, Health Care REIT reaffirmed its guidance and expects normalized FFO in the range of $3.70–$3.80 per share. Also, it expects normalized FAD to range from $3.25– $3.35 per share. Both the projected ranges represent an increase of 5%–8% over the 2012 reported figures.
Dividend
Health Care REIT declared a cash dividend of 76.5 cents per share for second-quarter 2013, marking a rise of 3.4% over the year-ago dividend of 74 cents. It will be paid on Aug 20, 2013, to stockholders of record on Aug 6, 2013. This marks the company’s 169th consecutive quarterly dividend payment.
Our Take
We are encouraged with the decent results at Health Care REIT. The company boasts a strong portfolio of senior housing, long-term care and medical office facilities. Moreover, the completion of the Sunrise Senior Living facility acquisition, the Revera deal in Canada and the Avery Healthcare investments in the U.K. are expected to further enhance the company’s high-quality senior housing portfolio and extend its reach in the high-barriers-to-entry affluent markets.
However, intense competition in the healthcare industry and the company’s acquisition spree is expected to raise the upfront operating expenses.
Other REITs
Another healthcare REIT, Ventas Inc.’s (VTR) second-quarter 2013 normalized FFO per share of $1.01 missed the Zacks Consensus Estimate by a penny but rose 6.3% year over year. While a rise in share count, higher debt levels and an increase in net cash balances acted as dampeners for the quarter, Ventas’ results benefited from strategic investments made in 2012.
Moreover, Healthcare Realty Trust Inc. (HR) reported second-quarter 2013 normalized FFO per share of 32 cents, beating the Zacks Consensus Estimate by 2 cents.
Health Care REIT currently carries a Zacks Rank #3 (Hold). Another well-performing REIT is Extra Space Storage Inc. (EXR) that has 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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