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Health Care REIT reports February 26, 2010

Posted by shaferfinancial in Finance, Uncategorized.
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As regular readers know, one of my three holdings is Health Care REIT [HCN].  They reported yesterday and I want to summarize for you.  Despite many REITs not doing well HCN continues to do quite well in this environment.  Overall, it is managed conservatively. Transcript of call here.

They started to realign their RE portfolio in 2005 and continue to make those changes.  They are selling off their free standing nursing homes and their free standing medical office buildings [MOBs] in favor of campus style facilities with tie-ins to either senior housing or hospitals.  In this vein their free standing skilled nursing facilities dropped to 17% of the portfolio [38% in 2005] while the while free standing dementia, assisted living and independent living dropped to 8% [26% in 2005].  Medical facilities including MOBs has been strategically increased to 36% [from 4% in 2005].

Total capital raised last year was $1.3Billion [$700M equity, $266 Freddie Mac Debt, $325M from sales of facilities].   Completed gross investments was $717 million of which nearly 90% related to HCNs preferred investments in combination senior housing facilities and customer focused medical facilities.  2010 has seen $568M more investments in the process of being closed.  The  most recent is a joint venture with Forrest City Enterprises on 7 MOBs located across from the campus of MIT.  These include labs and office buildings housing some of the biggest life science corporations in the world with a 100% occupancy rate for the last 11 years.  Very high quality RE as you can see with ties to MIT and MGH and Brighams and Children Hospital.

Total investments for 2009 were $717M.  They have 14 entrance fee senior communities with 2 of these still being constructed.  The occupancy rate for the MOBs went back over 91% at the end of the year, demonstrating strength in a difficult environment while revenues from hospitals continue to increase.

4th quarter FFO was .75 per share a 9% decrease from the year before directly attributable to the additional shares sold during  2009 to increase capital amounts.  Debt continued to decline as a percentage of book value to 35%.  HCN has deleveraged over the last two years from concerns of the debt market.  They are forecasting $1B to $1.2B in investments over 2010 and an increase in FFO of 3-8%.

So far so good.  Here are the areas of concern.  Payout ratio of 91% still remains a little high and in the future they will try to decrease that back down to the mid 80s where it has historically stood.  The entrance fee communities still are under performing due to the recession in real estate, although there was a general increase over the year.  But this increase was accomplished by a lowering of rents and entrance fees.  At this point they still are not planning on increasing the dividend for 2010, although during the call they did say they might revisit this for the last two quarters.

Annual FFO per share decreased 6% to $3.13 mainly due to increased amount of stock outstanding.  For the year, dividends paid out were $2.72 and the stock price went from $39.77 to $ 44.32 for a total return of 18%.

I did buy some more shares during the year in the low to mid 30s, bringing my personal dividend yield down below 11% [I have been accumulating this stock for a decade].

If the price remains in the low 40s I will consider purchasing some more in the 1st half of 2010.  I think that the dividend should start to rise either late 2010 or 2011 as all this activity plays itself out.  They currently have almost $1B left on their $1.2B line of credit and I believe they will use some of it during 2010 for additional projects.  Currently, they are very conservatively aligned regarding their overall debt structure and I see no immediate future issues with debt.  However, until the dividend starts to rise again, I would not expect the price to raise much, if at all from its current spot in the low 40s.



1. QC Watchdog - February 28, 2010

So refreshing to read your summaries as I have a hard time understanding their releases and those of other third-party financial reporters. Thanks so much for this!

2. Jed Dahl - March 1, 2010

I recommend Realty Income (O) in addition to HCN. Since most of their commercial holdings seem to be focused on stronger holdings, I think they’ll weather the coming commercial storm.

3. shaferfinancial - March 1, 2010

Thanks QC.
Jed, don’t know much about Realty Income. Will look into it when I have time although I am pretty happy with HCN.

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