HCN Hits 52-Week High: Right Time to Buy? - Analyst Blog

Shares of Health Care REIT Inc. (HCN) scaled a new 52-week high of $73.07 on Nov 24. The stock closed at $72.29, reflecting a solid year-to-date return of 42.0%. The trading volume for the session was nearly 1.3 million shares.

Last week, HCN accomplished the purchase of HealthLease Properties REIT. The company reported better-than-expected performance for third-quarter 2014. Therefore, despite scaling such high, we believe this Zacks Rank #3 (Hold) stock has plenty of upside left, given the improving operating fundamentals and opportunistic acquisitions.

Growth Drivers

The HealthLease acquisition deal brings on board 53 high-quality seniors housing, post-acute care and long-term care communities, concentrated over North Carolina, IN, and Alberta, Canada, according to an earlier revelation by the company. The purchase price denotes a 7% initial cash yield.

Managed under long-term triple-net lease agreements by reputed operators, the portfolio acquisition is expected to facilitate a steady source of rental income in the long term, thus providing HCN with a competitive edge.

HCN also entered into a partnership with Mainstreet Property Group that includes a deal under which HCN would shell out around $369 million, reflecting a 7.5% initial cash yield, for acquiring 17 communities under the Next Generation brand. The acquisition is expected to close in phases after construction is accomplished, starting in fourth quarter of the current year through the first quarter of 2016.

Furthermore, HCN struck a deal with Mainstreet to offer mezzanine financing at favorable mid-teen interest rates and gain purchase option rights for another 45 Next Generation development projects, upon accomplishment of each project. This represents an acquisition pipeline worth $1.0 billion, expected to be delivered in phases from 2016 through first-quarter 2017.

HCN reported third-quarter 2014 normalized funds from operations (FFO) of $1.04 per share, a penny ahead of the Zacks Consensus Estimate and up 7 cents year over year.

The 7% year-over-year increase in normalized FFO per share is primarily driven by growth in same-store net operating income (NOI) and notable portfolio investments in premium assets.

Going forward, we believe that strategic portfolio restructuring activities and enhanced liquidity position bodes well for the company's growth. In addition, a rise in senior citizen spending for healthcare reasons promises strong prospects.

Echoing similar sentiments, over the last 30 days, the Zacks Consensus Estimate for 2014 remain unchanged at $4.12 while that for 2015 moved north by a cent to $4.36 per share.

Other REITs Scaling Highs

Other REITs that have scaled 52-week highs on Nov 24 include Apartment Investment and Management Co. (AIMCO) (AIV), Equity Residential (EQR) and Ventas, Inc. (VTR).

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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