Health Care REIT Remains a Long-Term Income Play (HCN)

If it weren’t for the looming threat of higher interest rates, a bullish call on Health Care REIT, Inc. (NYSE:HCN) would be remarkably clean.

HCNHCN beat Wall Street’s top- and bottom-line estimates in the most recent quarter and issued a in-line forecast. The market applauded the news, sending shares in HCN up more than 2% in early trades. Yet even after that pop, the dividend yield on HCN sat a healthy 4.3%.

Health care real estate investments trusts (REITs) are one of the few places investors can find both fat dividend yields and solid growth in this market. HCN, for its part, has been one of the better bets in the sector.

HCN, which operates senior living facilities, hospitals and medical offices, has been on something of an acquisition tear, and that’s helped fuel top-line results. Shares are up just 3% for the year-to-date, beating the broader market by about a percentage point. Over the last 52 weeks, however, HCN gained 34% to outperform the S&P 500 by 20 percentage points.

Given HCN’s most recent results, there’s ample reason to expect even more upside. For the most recent quarter, HCN funds from operations (FFO) — the most important measure of a REITs profitability — rose to $1.03 a share from 99 cents a year ago. (FFO is a big deal for REITs because they’re requited to pay out most of their earnings as dividends in exchange for certain tax breaks.)

Analysts polled by Thomson Reuters were looking for FFO of $1.02 a share and revenue likewise topped their forecasts. HCN’s top line expanded to $867.8 million from $788.6 million a year ago. Analysts, on average, expected revenue to come in at $855.4 million.

The bottom-line beat was driven primarily by same-store net operating income growth of 3.5% year-over-year and high quality investments.

Investments Lead HCN Quarter

Led by its $950 million acquisition of HealthLease Properties Real Estate Investment Trust, HCN completed $1.8 billion of gross investments for the quarter. Of that total, $1.5 billion went to acquisitions and joint ventures, $89 million was invested in development funding, $170 million was put into loans, and $4 million went to capital improvements.

Most importantly, HCN didn’t disappoint investors with its profit forecast. Although a beat-and-raise quarter is the market’s favorite kind of earnings report, beat-and-affirm ain’t bad either.

For the full year. HCN projected FFO to be $4.25 to $4.35 per share, comfortably bracketing the Street estimate of $4.33.

If there’s a knock on REITs, it’s that the market is worried about the Federal Reserve’s seemingly inevitable rate hike. When rates rise, securities like dividend stocks and and shares in REITs will have more competition from bonds, and that should depress their prices.

Beyond that, the outlook for healthcare REITS remains bright amid the national expansion of health insurance coverage and a the aging of the baby boomers.

A rate hike will likely hurt HCN in the shorter term, but as a long-term income play, it has a lot going for it.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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