HCN Addresses Senior Living Supply Concerns, Q3 Profits Drop

Health Care REIT (NYSE:HCN) saw profits drop 37% to $33.6 million compared to the prior year following $1.2 billion of investments for the third quarter ended Sept. 30, 2013. 

Net income attributable to common stockholders plummeted 44% to $20.7 million or $0.07 per basic and diluted share, down from $37.3 million a year ago.

However, gross revenues shot up more than 70% to nearly $787 million in the quarter compared to $461.8 million a year previously. Year-to-date, the REIT has made $5.3 billion of investments, with third quarter activity including transactions with Sunrise, Avery, Silverado, and Vibra. 


Same-store net operating income grew 3.7% in the quarter, driven in large part by a 9.4% NOI growth in the seniors housing operating portfolio, according to Health Care REIT’s chairman and CEO George Chapman. Normalized funds from operation rose 7% from the previous year to $0.97 per share. 

HCN announced a voluntary group purchasing program it recently implemented for food, after the REIT introduced a similar program for property insurance that produced low double-digit savings.

Around half of the REIT’s operators have opted into the program, which is currently in rollout phase. “It remains to be seen exactly what the savings will be,” said Chuck Herman, chief investment officer and executive vice president, during the earnings call with analysts.


Health Care REIT executives also discussed concerns about new senior housing construction and announced a new part of its supplemental information packet showing metropolitan statistical area NOI exposure by property segment. 

“Supply and demand in seniors housing is all about the local market, so we monitor activity in every one of our locations,” said Scott Brinker, executive vice president of investments. 

Out of the REIT’s nearly 700 local market communities around the U.S., U.K., and Canada, only 58 communities have new supply entering the market area. Of those, 35 are either in a triple-net master lease or are a different service type from what’s being built, making any impact on Health Care REIT “negligible,” according to Brinker. 

The remaining 23 communities facing direct impact form new competition represent only 2.6% of HCN’s income.

“We’ve strategically focused on big metro markets with dense population and a lot of affluence,” Brinker said. “Even when there is a new competition and there might be of 5% or 10% increase in the total supply, and there might be a temporary decline in occupancy or rental rates, over time those are the types of markets that can support new supply.” 

On the acquisition side, Health Care REIT says there’s a very active marketplace with a lot of opportunity, but a couple potential issues.

“One is being patient, so that we’re paying prices that allow us to make money day one and over time,” said Brinker. “There’s no question in our mind that health care REITs, over time, will end up as much bigger companies than they are today, but we have to be patient and not pay prices that don’t make sense.”

Brinker also noted the REIT’s relationships with existing clients that have been a “meaningful” source of accretive deal flow in the past five years.

“Seniors housing, medical office space, skilled nursing, they come to us with their opportunities to grow in their existing markets or to put up new supply where they see a need,” he said. “You’ll see us focus on those existing clients going forward and selectively adding new ones to our portfolio.”

View the third quarter earnings report.

Written by Alyssa Gerace

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