As the first real estate investment trust to focus exclusively on properties used in the healthcare industry, Health Care REIT (NYSE: HCN) was able to select the company name with covers an entire REIT sector. Throughout its long history, Health Care REIT has provided very attractive returns to investors and the company remains on a path of growth which should continue the trend.
Health Care REIT owns 900 properties in 42 state properties which are used for senior living facilities, skilled nursing care, medical office buildings, acute and specialty care hospitals and life sciences. Senior living facilities account for just under half of the company's portfolio value, skilled nursing accounts for 27 percent, medical office buildings 18 percent and hospitals and life sciences facilities the remaining 7 percent. About 40 percent of the Health Care REIT facilities are located in the northeast portion of the U.S.
In 2011, this healthcare REIT aggressively increased its asset base through acquisitions. At the end of October 2011, the value of real property owned on the Health Care REIT balance sheet was $13.7 billion, almost double the $7.5 billion on the books one year earlier. The portfolio growth was the result of almost $5 billion of investment and joint venture activity for the year. Besides the purchase of existing healthcare facilities, the REIT has an active construction program. The company's construction book lists about $190 million current committed to senior housing construction, $30 million to hospital construction and $235 million to medical office construction.
Financial results include a year-over-year increase of 13% in funds from operations – FFO. The projected FFO for the full year of 2011 is approximately $3.40 per share, up 10% from the 2010 results. In the quarterly earnings reports, Health Care REIT also reports funds available for distribution – shown as FAD. In the 2011 third quarter, the 71.5 cent dividend was 80% of FFO per share for the quarter and 91% of FAD. These percentages are slightly lower than the portion of cash flow paid out in the third quarter of 2010. In January, the quarterly dividend was increased to 74 cents per share. This $2.96 annual distribution rate represents 87% of the 2011 funds from operations. If the company results follow historic results, the actual FFO for 2012 will be higher, lowering the percentage of cash flow paid out as dividends allowing the dividend to be increased again in January 2013.
The impressive factor about Health Care REIT as an investment is the company's long history of double digit returns to investors. Over the company's 40 year history, the shares have provide a 15% return to investors, including share appreciation and dividends. Over several terms of years, the returns remain above 10 percent. Through early November 2011, the average annual returns for one, five, 10 and 20 years were 11.6%, 11.1%, 14.5% and 14.5%, respectively. These consistent returns are not mirrored throughout the healthcare REIT universe. Some of the competitors to Health Care REIT include HCP, Inc. (NYSE: HCP), Healthcare Realty Trust (NYSE: HR) and Senior Housing Properties (NYSE: SNH). Comparing the HCN to these other REITs on the 5-year chart shows Health Care REIT outperformed the nearest competitor by at least 15% in share price appreciation and was as much as 70% better than the two health REITs which are down in value over the five years.
The yield on Health Care REIT shares is currently about 5.25%. The dividend payout rate has been consistently increased outside of a two quarter reduction period at the end of 2006 following which the payout returned to the previous level plus an increase. The recent annual dividend increases have typically been 3% to 4% greater than the previous year rate.
Health Care REIT has provided consistent long term returns to investors and in 2011 the company went on an acquisition binge to increase the size of its property portfolio. It appears the company management is very positive on the potential for healthcare properties going into the future. With the size of the senior citizen population growing at four time the rate of the general population, the focus on senior housing and skilled nursing facilities should pay increased dividends – pun intended – in the future. The only negative factor, especially for value investors, is buying shares of a stock trading at or near the 52-week high, as the stock currently is. One remedy is to put HCN on your list of stocks to buy when the market or REIT sector make a serious pull back.
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