Health Care REIT (HCN) Eyes Premium Assets: Time to Hold?

On Jan 5, 2014, we issued an updated research report on Health Care REIT, Inc. HCN. The Toledo, OH-based equity real estate investment trust (“REIT”) is continuing with its focus on the premium assets across global affluent markets. Through a string of strategic buyouts and development activities, the company is enhancing its portfolio mix. At the same time, the company is also keen on divesting its non-core businesses.

Major buyouts of REITs like Gracewell Healthcare and HealthLease Properties REIT enhanced its portfolio quality. Also, in the third quarter, the company closed $757 million of gross investments. This included $653 million in acquisitions and $76 million in development funding, mainly targeted toward the premium assets. We expect such opportunistic investments in high-quality assets to facilitate a steady source of revenues going forward, besides providing the company with a competitive edge.

Though the acquisitions and development of high-quality assets are a strategic fit for the REIT, it involves considerable upfront costs. Further, new developments will take time to bear fruits. In fact, rising expenses have been a concern for the company. In the first nine months of 2014, expenses rose 8.5% to $2.2 billion.

Notably, Health Care REIT reported third-quarter 2014 normalized funds from operations (“FFO”) of $1.04 per share, beating the Zacks Consensus Estimate by a penny and the year-ago quarter figure by 7 cents. The improved performance is primarily driven by growth in same-store net operating income (“NOI”) and notable investments in premium assets.

Over the past 30 days, the Zacks Consensus Estimates for both 2014 and 2015 remained unchanged at $4.12 and $4.36, respectively.

Health Care REIT currently carries a Zacks Rank #3 (Hold).

Some better-ranked equity REITs include Ashford Hospitality Trust, Inc. AHT, Extra Space Storage Inc. EXR and Arbor Realty Trust Inc. ABR. While both Ashford Hospitality Trust and Extra Space Storage sport a Zacks Rank #1 (Strong Buy), Arbor Realty Trust carries a Zacks Rank #2 (Buy).

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