Healthcare: Health Care REIT (HCN) – Defensive Play for Growth and Income

Healthcare: Health Care REIT (HCN) – Defensive Play for Growth and Income

by Steven Halpern for Blogging Stocks

“Residential real estate is still struggling, and the worst may still lie ahead for commercial properties; but one type of real estate has stayed well shielded from market forces in the last several years,” says Stephen Leeb.

The editor of Income Performance Letter explains, “Aging Americans cannot easily delay seeking necessary medical and living-assistance care, regardless of the economy. So we now recommend Health Care REIT (HCN), a real estate investment trust has some 600 properties that focus primarily on senior housing and health-care properties.
“The companies properties include independent living/continuing care retirement communities, assisted living facilities, skilled nursing facilities, medical office buildings, and hospitals.

“Health Care REIT’s defensive qualities are shown by its strong financial performance. Income from continuing operations grew 16 percent in 2009, while funds from operations (a key REIT measure used to measure cash flow) grew 12 percent. Most other types of REITs suffered from declining FFOs.

“Health Care REIT generally leases its properties via long-term contracts (12-15 years), with either fixed or contingent rent escalation structures. This provides predictable cash flow, with the fixed-rent escalation structure ensuring rent growth even during rough times.

“At more than three-quarters of HCN’s properties, the tenants assume responsibility for operations and related expenses, including maintenance and repair, under triple net leases.

“Even in the case of the other properties, leased under operating leases, the company receives full or partial reimbursement from tenants for such expenses. So, in general, the REIT just collects the rent with little direct operational risk exposure.

“Medical-care providers likely will get a jolt with the addition of 32 million Americans to the medical-coverage rolls under the new health-care legislation.

“But Health Care REIT already has a significant benefit from an even bigger demographic trend: an aging population that’s living longer than ever. Rising health care for seniors is clearly a favorable trend for Health Care REIT.

“The company now is focusing more than before on growth and diversification. In February, HCN formed a major joint venture with Forest City Enterprises and invested $327 million for a 49 percent stake in a fully occupied, seven-building biology/life sciences campus on land owned by Massachusetts Institute of Technology.

“Health Care REIT also maintains a strong balance sheet, with debt at just 69 percent of equity, much better than most REITs. And the company’s debt obligations are spread out, with no more than $300 million coming due in any year over the next 15.

“The shares yield a lofty 6.2 percent. Between modest price-appreciation and dividend-growth potential, this REIT offers double-digit total return potential.”

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