Health Care REIT Inc.
), a real estate investment trust (REIT) that operates senior
housing and health care real estate, reported third quarter 2012
FFO (funds from operations) of 75 cents per share, compared to 85
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 91 cents per share, compared to 89 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 $474.1 million
compared to $370.7 million in the year-earlier quarter. Total
revenues for the reported quarter were well ahead of the Zacks
Consensus Estimate of $465 million.
Total same-store cash NOI (net operating income) increased 3.6%
during the quarter compared to the year-ago period, including
7.0% growth in the senior housing operating portfolio.
During the reported quarter, Health Care REIT made gross new
investments of $1.0 billion, bringing the year-to-date tally to
$2.9 billion. These included $243.5 million worth of acquisitions
of five healthcare facilities in the U.K. from
Sunrise Senior Living Inc.
). With a blended net operating income (NOI) yield of 7.2%, the
properties were purchased from a partnership between Sunrise and
an institutional investor.
The strategic purchase stemmed from the deal when Health Care
REIT penned an agreement with Sunrise Senior Living to acquire
all of its outstanding shares. The offer price of $14.50 for each
of the Sunrise Senior Living share equated to a real estate value
of approximately $1.9 billion.
Health Care REIT decided to pay approximately $950 million in
cash and the balance through the assumption of debt at an average
interest rate of approximately 4.9%. The transaction is likely to
close in early 2013, subject to mandatory regulatory approvals
and closing conditions.
With the deal, Health Care REIT is poised to acquire 20
wholly-owned senior housing communities from Sunrise Senior
Living, along with its 105 joint venture properties (five of
which are mentioned above). About 17 of the wholly-owned
properties are located in the U.S., while the remaining three are
in Canada. The bulk of the joint venture properties are also
located in the U.S. (about 78), with the remainder in the U.K.
The domestic portfolio is mostly concentrated in New York, Los
Angeles, San Francisco, Washington, D.C., Philadelphia, Boston,
and Chicago. Almost half of the acquired portfolio is located in
the top 5 MSAs (metropolitan statistical areas). The acquisition
would position Health Care REIT as one of the largest owners of
senior housing facilities worldwide with over 58,000 units in the
U.S., Canada, and the U.K.
With a median age of eight years, the acquisition would enable
Health Care REIT to own high-quality private pay senior housing
communities in high-barrier-to-entry affluent markets. In
addition, the company is likely to gain operational synergies as
an experienced and dynamic management team from Sunrise Senior
Living, with over 30 years of experience, comes on board.
Besides improving the economies of scale, the acquisition would
further enable Health Care REIT to gain access to higher yielding
embedded investment opportunities, as more and more ownership
stakes in joint venture properties come up for grabs. The senior
housing sector is a highly-fragmented market with limited new
supply and positive growth indicators, with the over-85
demographic growing at three times the rate of the overall
According to the U.S. Census Bureau, the elderly population (aged
65 and older) is expected to jump 36% from 2010 to 2020 to 54.8
million people. The latest acquisition by Health Care REIT,
therefore, reinforces the buzz in the healthcare REIT industry,
spurred by an aging Baby Boomer generation's increased demand for
assisted and independent living facilities.
The acquisition brings two of the most complementary customer
franchises to the same platform in the healthcare real estate
market and increases the scale and diversification of the
combined company. The acquired assets overlap with Health Care
REIT's health system, assisted living and senior housing
portfolio and offers continuum of services.
On the other hand, the deal also enables Sunrise Senior Living to
continue its investment in optimizing and expanding its
facilities to meet the increased needs of the acute care patient
population. Consequently, the transaction is a win-win deal for
both of the participating companies.
Close on the heels of the acquisition of Sunrise Senior Living,
Health Care REIT also decided to offload its management company
business. To materialize the decision, Health Care REIT penned an
agreement with the affiliates of investment firms
Kohlberg Kravis Roberts & Co.
), Beecken Petty O'Keefe & Company, and Coastwood Senior
Housing Partners LLC, to form a new entity that would acquire the
divested business. Health Care REIT would invest about $26
million for a 20% ownership stake in the joint venture.
The divested business would include the existing management
contracts of Sunrise Senior Living along with the 125 communities
set to be acquired by Health Care REIT. The newly-formed joint
venture entity would subsequently induct all the employees of the
erstwhile Sunrise Senior Living and operate under the 'Sunrise'
During the reported quarter, Health Care REIT made about $56
million worth of investments in medical office buildings (MOBs)
at a blended yield of 7.1%. These include the purchase of three
MOBs (average occupancy of 98%) spanning 220,000 rentable square
feet in aggregate and one development completion (13,400 rentable
square feet, 100% leased).
At the same time, the company completed $611 million worth of
investments in senior housing triple-net leases at a blended
yield of 7.1%. Health Care REIT completed $133 million worth of
asset sale transactions during the quarter.
HEALTH CR REIT (HCN): Free Stock Analysis
KKR & CO LP (KKR): Free Stock Analysis
SUNRISE SENIOR (SRZ): Free Stock Analysis
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Health Care REIT obtained a $250 million Canadian denominated
unsecured term loan (approximately $249 million USD) to increase
its Liquidity. The company was able to reduced debt to
undepreciated book capitalization to 38% by the end of the
quarter from 45% in the previous quarter. During the reported
quarter, Health Care REIT issued 43.7 million shares for proceeds
of $2.4 billion. At quarter-end, the company had cash and cash
equivalents of $1.4 billion.
Health Care REIT maintained its quarterly dividend of 74 cents in
the reported quarter, which marked the 166th consecutive
quarterly dividend payment. The third quarter 2012 dividend
marked a 3.5% year-over-year increase over the year-ago period.
With superior results, the company increased its quarterly
dividend to 76.5 cents (up 3.4%) or $3.06 per share annually for
full year 2013.
Health Care REIT updated its recurring FFO guidance for 2012. The
company has currently revised its recurring FFO guidance for 2012
from the earlier range of $3.53 - $3.63 to $3.49 - $3.53 per
We maintain our Neutral recommendation on Health Care REIT, which
presently has a Zacks #3 Rank translating into a short-term Hold
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.