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Health Care FFO Beats, Guides Same

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Health Care REIT Inc. , a real estate investment trust (REIT) which operates senior housing and health care real estate, reported first-quarter 2013 normalized FFO (funds from operations) of 91 cents per share, a cent ahead of the Zacks Consensus Estimate and up 4 cents year over year.

The increase in year-over-year FFO per share was primarily attributable to better-than-expected revenue growth. The company registered a decent same-store NOI growth and asset value appreciation.

Funds available for distribution (FAD) in the reported quarter stood at 81 cents per share compared with 78 cents per share in the year-ago period.

Behind the Headlines

Total revenue reached $633.9 million, escalating 51.7% year over year. The figure also exceeded the Zacks Consensus Estimate of $549 million. Total same-store cash NOI (net operating income) increased 3.5% from the year-ago period. This included a 5.6% rise in the seniors housing operating portfolio. The company increased its private pay mix to 82% in the reported quarter from 73% in the year-ago quarter.

Sunrise Acquisition Update

Health Care REIT completed the acquisition of the Sunrise property portfolio, the divestiture of the Sunrise management company and the acceleration of all planned joint venture (JV) buy outs.

Prior to the culmination of the Sunrise property portfolio acquisition, the affiliates of investment firms, Kohlberg Kravis Roberts & Co. (KKR - Free Report) and Beecken Petty O’Keefe & Company acquired the divested management company business for $130 million.

Health Care REIT’s current investment in Sunrise properties is worth $3.5 billion and it expects the investment to escalate to $4.3 billion by Jul 2013, subject to exercising of its rights to acquire additional JV partner interests at fixed purchase prices.

It expects to make investments worth $4.3 billion for 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 purchase to generate an unlevered initial yield of 6.5%, or 6.1% after capital expenses.


During the quarter under review, Health Care REIT accomplished around $2.5 billion in seniors housing operating acquisitions. This includes 2 properties with Brookdale Senior Living Inc. (BKD - Free Report) for $53 million and the Sunrise Senior Living acquisition. In addition, it closed the acquisition of 2 seniors housing triple-net properties aggregating $57 million at an yield of 7.0%.

Health Care REIT completed development projects worth $135.5 million at a blended yield of 8.5%. This comprised $75 million of seniors housing and care projects at a blended yield of 9.0% and $60.5 million for a medical office building (having 121,000 rentable square feet and is 100% leased) at a 7.8% yield.


As of Mar 31, 2013, Health Care REIT had cash and cash equivalents of $269.8 million, compared with $469.2 million as of the prior-year quarter end. The company raised its unsecured line of credit facility to $2.25 billion and extended term through Mar 2017.


Health Care REIT declared a cash dividend of 76.5 cents per share for first-quarter 2013, marking a rise of 3.4% over the year-ago dividend of 74 cents. It will be paid on May 20, 2013, to stockholders of record on May 7, 2013. This marks the company’s 168th consecutive quarterly dividend payment.

Outlook Reaffirmed

For full-year 2013, Health Care REIT reaffirmed its guidance and expects normalized FFO in a 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.

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 further boosted the company’s high-quality senior housing portfolio and extended its reach in the high-barriers-to-entry affluent markets.

Notably, 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. Yet, a large portion of its revenue originates from a few tenants, which exposes it to concentration risks, and undermines its growth potential to some extent.

One of the REITs, Ventas Inc. (VTR - Free Report) has yet again come up with impressive first-quarter 2013 results. Its normalized FFO reached $1.03 per share in the first quarter, 4 cents ahead of the Zacks Consensus Estimate of 99 cents and 13% ahead of the year-ago FFO of 91 cents per share, primarily driven by strategic investments in 2012.

Health Care REIT currently holds a Zacks Rank #4 (Sell). However, another REIT stock that is performing better and deserves a look is Healthcare Trust of America Inc. (HTA), 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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