Value Line recently initiated coverage of Health Care REIT, Inc. (HCN). The company owns health care related real estate, including seniors housing communities, skilled nursing/post-acute facilities, medical office buildings, inpatient and outpatient medical centers, and life science facilities throughout the United States. The company is headquartered in Toledo, Ohio, and employs more than 300 individuals. The stock is a component of the S&P 500 Index.

Health Care REIT, founded in 1970, initially focused on purchasing skilled nursing facilities. Throughout the 1980s and 1990s, its portfolio expanded materially, and included independent living assets, as well as assisted living properties. Its asset portfolio amounted to $734 million in the mid-1990s, and reached $3 billion by 2005. In the years that followed, management remained active on the acquisition front, and completed sizable purchases in 2006 and 2007. First, it bought Windrose Medical Properties Trust, which owned medical office buildings and acute care facilities. The next year, Health Care REIT bolstered its property management capabilities with the purchase of Paramount Real Estate Services from affiliates of Rendina Companies. At the end of 2011, Health Care’s portfolio consisted of 937 properties totaling more than $14 billion in assets.

As its name suggests, the company operates as a real estate investment trust. REITs were created by the United States Congress in the 1960s, giving individuals the opportunity to invest in large property businesses. Most importantly for investors, REITs must invest at least 75% of their assets in real estate and distribute 90% or more of annual taxable profits as dividends, to shareholders. For a more complete description of this corporate structure, please peruse Value Line’s REIT Industry Overview.

Along with competition from other medical services providers, Health Care’s top and bottom lines are influenced by a myriad of factors, but most importantly, occupancy rates and Medicare/Medicaid reimbursement. Health Care owns medical office buildings and other rental properties. A large portion of the company’s revenues come from occupancy and rental income, and it is vital that its facilities possess a roster of reliable tenants. In 2011, its medical office buildings were 93.4% full, 30 basis points better than 2010’s tally. Occupancy is heavily dependent on rental prices and the health of the U.S. economy. Health Care REIT’s skilled nursing facilities, hospitals and some other businesses derive the bulk of their revenues from Medicare and Medicaid programs. Thus, changes in the federal or state reimbursement laws can affect the company’s financial performance.

When evaluating Health Care’s financials, it is important to remember that it is a REIT. Due to their unique business model and property holdings, properly evaluating a REIT requires some additional metrics. As mentioned, for Health Care, occupancy and rental income are leading indicators. Funds from operations (FFO) is also one of the more common figures used. This measure is a REIT’s net income, excluding gains or losses from asset sales, plus depreciation and amortization. Although similar in nature to earnings per share, the use of FFO has its advantages; owning and managing properties leads to hefty depreciation and amortization expenses (non-cash charges), which are better represented in the FFO calculation. For a detailed evaluation of Health Care’s business and the equity’s investment merits, subscribers are advised to monitor our regular quarterly coverage in The Value Line Investment Survey, while keeping an eye out for Supplementary Reports when breaking news takes place.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.