Real Estate Sector Ideas

[gfp927z]

Healthcare REIT sector -- >>> Ways to Profit From an Aging US Population



By Adnan Khan

May 17, 2013

Tickers: HCP, HCN, VTR



http://beta.fool.com/equityfinancials/2013/05/17/aging-us-population-help-these-stocks/34229/?source=eogyholnk0000001




The US healthcare real-estate investment trusts provide an indirect exposure to the US healthcare sector. America’s aging population needs growing healthcare services. Healthcare REITs should be part of your diversified income portfolio. Two of the largest healthcare REITs are Health Care Property Investors (NYSE: HCP) commonly referred to as HCP, and Healthcare REIT (NYSE: HCN), commonly referred to has HCN. Both have reported their performances for the first quarter of the current year. Let's discuss their latest quarter’s results and also see whether the sector provides growth opportunities for investors looking to expand their regular income.

Aging US population

The US healthcare and senior-housing market is worth around $1 trillion. However, public healthcare REITs are only 10% of the entire healthcare real estate market. This means there is tremendous opportunity for REIT growth, primarily through acquisition. Within this enormous real estate market, the medical office buildings (MOBs) are the largest property class, accounting for around 39%, followed by hospitals at 31%.

This aging population has resulted in growth in the senior housing communities during the past 11 consecutive quarters. This growth has translated into a solid demand for new construction and higher occupancy rates. However, the skilled nursing facilities have seen a slowdown.

What’s going on at HCP?

HCP reported an adjusted funds-from-operations-per-share of $0.74 for the first quarter of the current year, two cents above the mean consensus estimate. During the quarter, the same-store net operating income (NOI) came in at 1.1%, down 320 basis points over the previous quarter due to slower growth in the senior housing and medical office buildings portfolio.

HCP made acquisitions worth $96 million during the first quarter including $38 million spent to purchase the remaining four senior housing communities with Emeritus. Another $58 million was spent on the development of other capital projects. Further, a building was leased 100% to LinkedIn which was spread across 70,000 square feet.

What’s in store for HCP’s investors?

For the full year 2013, you should expect the company to perform better than the prior year due to better results on sales of marketable securities. The management has raised its outlook by $0.02 to a new range of $2.94 - $3.0. This guidance does not include the effect of future acquisition. Therefore, any future acquisitions would cause additional upside.

HCP has agreed to buy $1.73 billion worth of senior-housing communities. The deal will include 10,350 units in 29 states. Going forward, the management at HCP expects this transaction to contribute up to $0.08 per share each year to the company’s funds from operations.

HCP is currently offering a dividend yield of 4.04% on its quarterly dividend rate of $0.52 per share. At the end of the first quarter, HCP generated $0.74 in FFO per share. Therefore, its cash-dividend coverage ratio comes out to be 1.4 times. It is evident from this ratio that the company’s dividends are not in any immediate danger.

What’s going on at HealthCare REIT?

HealthCare REIT reported better than expected results for the first quarter. The adjusted funds from operations of $0.91 per share edged up $0.01 per share compared to the consensus mean expectation. However, the same-store net operating income growth was down 50 basis points sequentially to 3.5%.

During the quarter, the company made $2.5 billion worth of investments, excluding the previously-announced Sunrise acquisition. A majority of this was in the senior housing operating portfolio, with $57 million in the senior housing-triple net portfolio, yielding as high as 7%. Although this is part of the entire HCN's portfolio, this elevated yield would increase the company's overall income-generating ability, resulting in higher dividend distributions.

What’s in store for HCN’s investors?

Excluding any anticipated investments, the management maintained the 2013 funds from operations guidance at $3.70 - $3.80 per share. This guidance represents 5% – 8% growth over the prior year’s results and does not include any anticipated acquisitions in the future. Therefore, the future acquisitions would add to the current guidance.

HealthCare REIT also announced a deal $1.35 billion worth where it will partner with Revera Inc. to own and manage 47 high-quality senior-housing communities. HealthCare REIT expects the first full year unlevered net operating income yield, after payment of management fee, will be 7%. This will be another high-yielding asset of the company which when added in the HCN's portfolio will have the effect of increasing the overall dividend yield of the company.

The company generated $0.91 in funds from operations, while it offers a quarterly dividend rate of $0.76 per share, yielding over 4%. Using these figures, I arrive at 1.2 times cash-dividend coverage ratio, which means shareholders can expect the company to continue the current dividend rate even if there are moderate headwinds.

Competition

Health Care Property Investors and HealthCare REIT compete with Ventas (NYSE: VTR) in the US healthcare REITs sector. The company has been ranked 50th in the most admired companies list by the Fortune Magazine.

During the first quarter, it reported 13% increase in its normalized funds from operations to $1.03, while the full year 2013 guidance comes in within the range of $3.99 to $4.07 per share. The company benefited from its 220 senior housing communities portfolio. The average occupancy increased 270 bps, while the net operating income after management fee surged 7.3% and the revenues per occupied room increased 3.2% during the first quarter. Approximately, 50% of the last year’s net operating income for Ventas came from senior housing. The aging US population coupled with the growth opportunities within the senior housing provides Ventas with tremendous growth prospects.

Conclusion

The aging US population and the growth prospects within the US senior-housing market will be the primary drivers of the stock prices for HCP and HealthCare REIT. Besides, offering growth prospects, both HCP and HealthCare REIT are generating more than sufficient cash from operations to support their current dividends. Therefore, I am bullish on both the stocks.

<<<