Health Care REIT (NYSE: HCN) made some big moves last year and they’re paying off, as the second-largest health care real estate investment trust boasted a record year of earnings and “phenomenal” 7.3% growth in its senior housing operating portfolio.
Its performance is driven, in part, by its bullish outlook on the post-acute care segment, strategic dispositions and a focus on urban markets, company executives said Friday during a fourth quarter earnings call with industry analysts.
Last year, the Toledo, Ohio-based REIT completed $3.7 billion of new investments and disposed of more than $900 million of non-strategic assets, with “positive momentum” continuing into 2015, said Scott Brinker, HCN’s chief investment officer.
Those investments included a $2.3 billion deal with HealthLease Properties REIT and Mainstreet, whose pipeline of post-acute care properties HCN has already begun to acquire.
“We are very bullish about the future of post-acute in this country,” said HCN CEO Thomas DeRosa. “We are investing with Genesis and we’re investing with Mainstreet. We’re very excited that Genesis is now public. … We need a strong, vibrant post-acute product in the health care delivery system in this country, and we are betting that Genesis is going to continue to bring that product to the market.”
In August, Genesis HealthCare announced that it had signed a definitive agreement to merge with Skilled Healthcare Group, Inc. (NYSE: SKH), creating a combined entity that would operate 449 skilled nursing facilities and 55 assisted living facilities. The merger was completed Feb. 2, and the newly combined company now operates under the name Genesis Healthcare, Inc., trading on the NYSE as GEN.
In addition to its investments, HCN also made strategic dispositions — including the $435 million sale of its entrance-fee portfolio in December — which DeRosa said is a cornerstone of HCN’s differentiated model.
“We’ve disposed of $2.5 billion in assets over the last five years,” he said, noting that it’s difficult for companies to grow their funds from operations (FFO) by doing so. “But that’s why we feel so good about the future and that’s what you should be expecting any company in the real estate sector [to] be doing — and you know what? They don’t do it.”
While HCN may be disposing of some of its assets, when it comes to the REIT’s current portfolio, “urban” is the key word. Nearly 60% of its operating portfolio is located in the 10 largest metropolitan statistical areas (MSAs) in the U.S., United Kingdom and Canada.
“Our decision to concentrate in these markets is paying off,” Brinker said.
Last year, HCN completed a record year of earnings with normalized FFO and funds after distribution (FAD) per share of $4.13 and $3.66, respectively, representing 8% and 9% increases from 2013.
For the fourth quarter, it generated normalized FFO and FAD per share of $1.03 and $0.91, respectively, representing 4% and 6% increases from the fourth quarter of 2013 — primarily attributable to $1.8 billion of investments and strong operations as evidenced by 3.5% same-store NOI growth, led by 5.7% for its senior housing operating portfolio.
“We look at health care real estate like many of the other REITs look at health care real estate: We want to be in the best markets. And we’re very focused on markets like New York and London, where there is a concentration of global wealth and where there is a trend toward increasing urbanization,” DeRosa said.
In January, reports surfaced that HCN was purchasing a New-England-based, nine-property assisted living portfolio managed by Benchmark Senior Living for $360 million. This type of portfolio, Brinker said, is ideal for the REIT.
“It’s exactly the type of portfolio that we want to own, and that you would want us to own,” he said.
The properties, located primarily in Massachusetts and Connecticut, comprise 691 units in total. And after Benchmark’s joint venture partner was looking to exit, HCN was “more than happy to step in,” Brinker said. Benchmark will continue to operate the communities and will be HCN’s 5% joint venture partner.
Additionally, HCN said it’s attracting interest from major pension funds, which seek to partner with the REIT on particular asset classes in urban markets.
“Our growing concentration in the key urban markets in the U.S., Canada and the U.K. — that is where the global pension funds like to invest across real estate classes. If they’re going to make an investment in health care real estate, it’s going to be in one of those markets,” DeRosa said. “They need a partner and we continue to look at opportunities that may be of interest to that new group of capital providers.”
Mid-year, HCN is expecting to open a new office in Toronto, Canada. It currently has a regional office in London.
With 2014 in the books, HCN is optimistic looking ahead at the rest of 2015, with a pipeline that’s “as full as it’s ever been.”
“We enter 2015 with perhaps the most modern, best-located and relevant real estate portfolio in the health care real estate industry,” DeRosa said.
Written by Emily Study