Health Care REIT Inc. (HCN), a real estate investment trust (REIT), which operates senior housing and health care real estate, reported third-quarter 2013 normalized funds from operations (FFO) of 97 cents per share, a cent ahead of the Zacks Consensus Estimate and up 6 cents year over year.
The improved results were primarily attributable to robust revenue growth. Alongside, the company registered decent same-store NOI.
Normalized Funds available for distribution (FAD) in the reported quarter stood at 86 cents per share, up from 82 cents per share in the year-ago period.
Behind the Headlines
Total revenue reached $786.9 million, escalating 70.4% year over year. The figure also substantially exceeded the Zacks Consensus Estimate of $728 million. Total same-store (cash NOI (net operating income) increased 3.7% from the year-ago period. This included a 9.4% rise in the seniors housing operating portfolio.
Notable Quarterly Activities
During the quarter, Health Care REIT accomplished the sale/leaseback transaction with Avery Healthcare for $212 million (£140 million) in the UK. The portfolio comprises 14 seniors housing communities with 940 beds.
Also, the company closed the triple net lease deal with Emeritus Senior Living (ESC) for a portfolio of 38 senior housing communities. Notably, the properties were previously owned by Health Care REIT in an 80%/20% joint venture with Merrill Gardens. As per the deal, Health Care REIT acquired Merrill Gardens’ 20% interest in the JV for $173 million, which includes pro rata mortgage debt of $74 million.
In addition, Health Care REIT sealed the buyout of $95 million worth of hospital acquisitions (at a blended yield of 9.5%) and medical office building worth $50 million (at a blended yield of 6.9%). Moreover, the company finished the development of 2 seniors housing triple-net assets for $38 million (at a blended initial yield of 8.1%) and 1 medical office building for $9 million (at an initial yield of 8.3%).
Year-to-date, as of Nov 5, Health Care REIT has garnered $412 million from asset divestitures and $66 million from loan payoffs.
Sunrise Acquisition
During the quarter, Health Care REIT accomplished the buyout of the last phase of the Sunrise Senior Living property portfolio worth $745 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 concentration of age and income-qualified elderly including 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.
Liquidity
Health Care REIT exited the third quarter with cash and cash equivalents of $164.8 million, compared with $1.38 billion as of the prior-year quarter end.
During the quarter, Health Care REIT generated $62 million of proceeds through the issuance of over 1 million shares under the dividend reinvestment program.
Outlook Revised
For full-year 2013, Health Care REIT revised its guidance and now expects normalized FFO in the range of $3.74–$3.80 per share (prior guidance being $3.70–$3.80). Also, it expects normalized FAD to range from $3.29–$3.35 per share (prior guidance being $3.25–$3.35). Both the projected ranges represent an increase of 6%–8% over the 2012 reported figures.
Dividend
On Oct 31, 2013, Health Care REIT declared a quarterly cash dividend of 76.5 cents per share, marking a rise of 3.4% over the year-ago dividend of 74 cents. It will be paid on Nov 20, 2013, to stockholders of record on Nov 12, 2013. This marks the company’s 170th consecutive quarterly dividend payment.
Our Take
We are encouraged with the strong 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 and the Avery Healthcare investments 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, HCP Inc. (HCP) reported third-quarter 2013 adjusted FFO per share of 79 cents, 2 cents ahead of the Zacks Consensus Estimate and 10 cents above the prior-year quarter figure. This was aided by substantial growth in revenues.
Moreover, Ventas Inc. (VTR) reported third-quarter 2013 normalized FFO per share of $1.04, which exceeded the Zacks Consensus Estimate by nearly 2% and the year-ago quarter figure by 8.3%. Results were driven by strategic investments made this year and last year.
Health Care REIT currently carries a Zacks Rank #3 (Hold).
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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