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Health Care REIT Annual Report- 2012 Edition March 13, 2013

Posted by shaferfinancial in Finance.
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I have been buying HCN REIT since the late 1990s. Over that time the company has made some distinctive changes which culminated in $4.4B in new investment properties last year. Over the last several years they have been disposing of their stand alone skilled nursing facilities and purchasing more private pay oriented assets. They concentrate on assets in large metro areas, located in higher end neighborhoods and encompassing health campuses. So far, the changeover is about complete. During this time period the growth of dividends has been sub-par in my opinion averaging 2.8% growth over the last 10 years. However, with timely buys I have been able to obtain a 16% yield on cost. Let’s look at what 2012 bought us?

FFO [Funds from Operations] increased to $3.52 from $3.41 in 2011. A rise of 3%.
FFD [Funds Available for Distribution] increased to $3.11 from $3.00. A rise of 4%. The payout ratio remains at 95% [90% required].
Net Income to Common Shareholders rose to $.98 from $.90 a 9% increase.
Quarterly dividend distribution rose to $.765 from $.74, a rise of 3.4%.
Increased same store NOI by 4%. Senior housing operating portfolio rose 8.6%.
Private pay mix up to 79% from 71% in 2011.
Debt remains around 40%.

I consider the strategy employed over the last few years very important to the future of the company. Moving from low-return skilled nursing facilities highly dependent upon government reimbursement to medical office buildings, clinics, campus style senior housing, etc. with private pay is likely to raise income faster than the government reimbursement and is a winning strategy over the long run. Last year they started a buy-out of Sunrise Senior Properties which was completed in January. These are high level properties with rents 100% higher than average. They are located in major cities like London, Montreal, Boston, and Los Angeles. The expected unlevered yield is 6.5%.

Because of the implementation of the strategy HCN is suggesting that FAD should rise 5-8% in 2012.
That is what I am looking for in terms of rising dividends going forward. I have been paying close attention to the ability of HCN to raise dividends over 5% annually going forward and would like to see it get closer to 7%. Despite my success with this company, I would consider moving my money into more productive areas if the dividend increases remain less than 4% going forward. I know part of the issue with the rising dividends was the 2008-2010 real estate issues and recession. Now that most of that is behind us and the new strategy is implemented, I expect higher rates of rising dividends.

The stock price rose 14% over 2012. It has risen another 5.6% since the first of the year.
With my 16% yield on cost and the 14% rise in value the total return for me last year was 30%. For initial investors starting in 2012, it was 20% with dividends included.

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