Health Care REIT Inc. (HCN), a real estate investment trust (REIT) that operates senior housing and health care real estate, reported second quarter 2012 FFO (funds from operations) of 73 cents per share, compared to 84 cents in the year-earlier quarter. The decrease in year-over-year FFO per share was primarily attributable to increased number of outstanding shares in the reported quarter.

Excluding one-time items, recurring FFO for the reported quarter was 89 cents per share, compared to 90 cents in the year-ago quarter. The recurring quarterly FFO beat the Zacks Consensus Estimate by 2 cents.

Total revenues during the reported quarter were $453.1 million compared to $369.6 million in the year-earlier quarter. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $440 million.

Total same-store cash NOI (net operating income) increased 4.2% during the quarter compared to the year-ago period, including 7.4% growth in the senior housing operating portfolio.

During the reported quarter, Health Care REIT made gross new investments of $1.1 billion, bringing the year-to-date tally to $1.9 billion. These included $602 million worth of investments from existing relationships with healthcare operators in the reported quarter. The company also received $125 million in proceeds from asset sales and loan payoffs, resulting in $32 million in profit for the quarter.

Health Care REIT has continually invested in assisted and independent living facilities, as demand for these facilities is set to increase with an aging Baby Boomer generation. In addition, the healthcare industry is the single largest industry in the U.S., based on Gross Domestic Product (GDP). Consequently, healthcare REITs are well poised to maintain their growth curves and simultaneously benefit shareholders with steadily rising dividends.

During the quarter, the company made about $212 million worth of investments in medical office buildings (MOBs) at a blended yield of 7.3%. These include the purchase of seven MOBs (average occupancy of 97.3%) spanning 739,000 rentable square feet in aggregate and one development conversion (71,000 rentable square feet, 100% leased).

At the same time, the company completed $400 million worth of investments in senior housing triple-net leases at a blended yield of 7.9%. These included the acquisition of 14 (100% private pay) seniors housing facilities for $234 million at a blended yield of 7.3%, and seven skilled nursing/post-acute facilities with Genesis Healthcare for $96 million at a blended yield of 8.9%.

In addition, during the reported quarter, Health Care REIT completed the acquisition of 42 seniors housing and care communities in high-growth Canadian markets in association with Chartwell Seniors Housing REIT. Out of these, 39 are equally owned by both the parties, while Health Care REIT will wholly own the remaining three properties. However, Chartwell will manage the portfolio under an incentive-based management contract.

During the reported quarter, Health Care REIT issued $600 million worth of 4.125% 7-year senior unsecured notes to increase its liquidity. In addition, the company obtained a $250 million Canadian denominated unsecured term loan (approximately $249 million USD) to further increase its cash reserves. At quarter-end, the company had cash and cash equivalents of $204.9 million.

Health Care REIT maintained its quarterly dividend of 74 cents in the reported quarter, which marked the 165th consecutive quarterly dividend payment. The second quarter 2012 dividend marked a 3.5% year-over-year increase over the year-ago period.

Health Care REIT updated its recurring FFO guidance for 2012 to better reflect the effect of an increase in the non-core asset sale target of $300 million from the previous target of $200 million. The company has revised its recurring FFO guidance for 2012 from the earlier range of $3.53 - $3.63 to $3.50 - $3.60 per share.

We maintain our Neutral recommendation on Health Care REIT, which presently has a Zacks #3 Rank translating into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #2 Rank (short-term Buy rating) for HCP Inc. (HCP), one of the competitors of Health Care REIT.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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Tickers in this Article: HCN, HCP

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