Health-care real estate investment trusts make up one of the market's sleepier industries. You simply won't find scorching growth among Healthcare Realty Trust (NYSE:HR), Health Care Property Investors (NYSE:HCP), and Income Investor selection Health Care REIT (NYSE:HCN). You will, however, find very consistent dividend payments and yields in the neighborhood of 7%.
Health Care REIT reported first-quarter earnings last Thursday, and the results were pretty close to what I expected in terms of growth and dividend coverage. For the quarter, the company earned $0.71 per diluted share in funds from operations (FFO) and $0.34 in diluted earnings per share. Both results were within a penny per share of last year's performance, but this year's results include stock compensation expense from options issuance.
A more useful metric for the company is its funds available for distribution (FAD), which was $0.84 per diluted share versus $0.66 per share last year. REIT companies can and do calculate FFO, FAD, and adjusted FFO (AFFO) in different ways. For FFO, there is a standard method of calculation defined by the National Association of Real Estate Investment Trust, and most REITs, including Health Care REIT, use this method. For FAD and AFFO, however, differences among companies are more common. The way Health Care REIT calculates FAD contains some of the adjustments that are normally made when adjusting FFO but leaves out recurring capital expenditures. This makes the company's calculation of FAD helpful for gauging dividend coverage but not very useful from an overall cash profitability perspective.
Health Care REIT has a few avenues available for continued growth. The first and easiest is the built-in rent increases it has in its lease agreements, and the other two are through acquisitions -- of properties and of developing properties. In its earnings release and on its conference call, the company discussed that it plans to invest $450 million to $550 million across the latter two opportunities this year, with $300 million of that amount going toward acquisitions. To help fund the expansion, the company also plans to sell $100 million to $150 million of its current properties. This effectively works out to $300 million to $450 million in net new investments.
Health Care REIT has done a great deal of work cleaning up its balance sheet the past couple of years, and as a result, it has some flexibility for its acquisition and development activity. While it's a bit of a cliche to say that companies such as pharmaceuticals stand to benefit from baby boomers reaching retirement age, I think the same is true for the health-care REIT industry. Paying the right price up front for investments in this sector is still important, however, to realizing the benefits of this long-term aging trend, but right now, health-care REITs in general and Health Care REIT in particular are pretty reasonably priced.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
