The Apple of REITs
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the name suggests, Health Care REIT (NYSE: HCN) is a real estate investment trust that provides a full spectrum of senior housing, health care real estate including medical office buildings, hospitals and facilities for skilled nursing. The company has a competitive advantage of constructing a diversified property portfolio by type, customer and geographic location. The company has the largest concentration of properties in New Jersey and California, each 10% of the entire real property held by HCN. The company generates stable cash flows predominantly from private pay sources in markets with strong demographics. The stock is offering a dividend yield of 5%, while it has a history of dividend increases. Most recently in February 2013, it increased its dividend 4% to $0.77 per share.
In comparison, HCP (NYSE: HCP) is another health care REIT that has a HCN like diversified portfolio of properties providing facilities to senior housing, life sciences, medical office and hospitals. It generates around a third of its quarterly revenues from rentals from senior housing, followed by medical office at around 27% and life sciences at 24% of the entire quarterly revenues. HCP is currently yielding 4.5%, while it is up 3% since the beginning of the year.
Ventas (NYSE: VTR) is another diversified giant in the US healthcare REIT space. The company grew three times in a short period. It has a presence in Canada and the US. The company has a history of dividend increases. It is currently yielding 3.7%, while it is engaged in a number of acquisitions.
Sabra Health Care REIT (NASDAQ: SBRA) is a mid-cap health care REIT with a market cap of $933 million. It is a wholly owned subsidiary of Sun Healthcare Group. Sabra has around 100 properties providing facilities to skilled nursing, assisted and independent living, mental health facilities and hospitals. The company is exclusively invested in US real estate, with around 15% of properties in New Hampshire and Kentucky each. This is why around 16% of its revenues come from its New Hampshire properties, followed by 14% from Connecticut. The stock is offering a dividend yield of 5.4%.
Cash Flow Predictability
HCN’s management agreements have a limited rollover risk and are embedded with structural protections that support portfolio cash flow stability. Additionally, the lease expiration schedule is well-laddered with no more than 7% of the leases expiring annually. The master lease agreements with healthcare facility operators and senior housing minimize their ability to selectively renew management agreements for higher performance assets.
Solid growth in the range of 3.5% - 5% on a quarterly basis was witnessed in same-store net operating income since the fourth quarter of 2010. During the third quarter of the prior year, NOI surged 3.6%, led by the senior housing operating portfolio at 7%. The company’s triple net senior housing represents 29% of the third quarter’s NOI, while skilled nursing, senior housing operating, medical office, hospital and life science were 27%, 18%, 17%, 6.3% and 2.1%, respectively. Solid mid-single digit same store performance is expected in the next 12 to 24 months for its senior housing operating portfolio, while low-single digit average growth is expected for the rest of the portfolio through 2014, coupled with incremental cash flow from new investments. For the trailing 12 months, net debt recurring operating EBITDA was five times. However, leverage is expected to rise to six times.
Liquidity and Capital Position
The company maintains strong liquidity and has access to adequate capital. The company raised around $6 billion during the prior year through unsecured bonds, unsecured term loans, common equity and preferred equity. The company is also believed to have sufficient liquidity. The total sources of liquidity exceeded usage by 1.2 times for the period October 1, 2012 to December 31, 2014. Sources of liquidity include unsecured credit facility, unrestricted cash and projected retained cash flows from operating activities after distributions. On the other hand, uses of liquidity include projected recurring capital expenditures, projected development expenditures and debt servicing. If the company refinances 80% of its secured debt, liquidity coverage could improve to 1.7 times. The staggered debt schedules benefit the company’s liquidity position. Only 15.2% of the total debt is maturing through 2014, while no more than 20% is maturing in any given year until 2018.
With an impressive history of dividend increases and the continued strength in the NOI, the HCN is worth considering for more aggressive, and growth minded, REIT investors. Besides, HCN provides a handsome dividend yield of 5%.
equityfinancials has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. The Motley Fool owns shares of Sabra Healthcare REIT . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!