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Published: Saturday, 3/21/2009

Toledo stalwart raises its profile

BY GARY T. PAKULSKI
BLADE BUSINESS WRITER

TOLEDO S Health Care REIT Inc. has survived hard times before.

Chief Executive Officer George Chapman remembers a period, during a state budgetary crisis in Pennsylvania, when customers there paid bills with a kind-of scrip issued by state officials.

We have made it through tough cycles and become better and more recognized, said the 61-year-old CEO who still carries the trim physique of his college basketball-playing days at Cornell University.

We view this as a very problematic time but also a time of opportunity.

With a $6.5 billion nationwide property portfolio of senior-citizen housing, nursing homes, and medical complexes, Health Care REIT is one of America s biggest commercial landlords.

The firm is shifting away from nursing homes and toward residential complexes such as this at St. Simons, Ga. The firm is shifting away from nursing homes and toward residential complexes such as this at St. Simons, Ga.
NOT BLADE PHOTO Enlarge

For most of its 39-year existence, it has been low-profile and little-known in its hometown. It quietly bought and sold properties, developed projects, collected rents, and surfaced every three months to announce hardly-paltry quarterly stock dividends.

But over the past few months, the company has attracted unaccustomed attention.

It was added to the prestigious Standard & Poor s 500 stock index of major U.S. corporations and announced plans to move from two floors in downtown Toledo s Fifth Third Center at One SeaGate office tower to the expansive Dorr Street corporate campus being vacated by Dana Holding Corp.

And, most important to investors, the company s shares provided a positive return in 2008, when the Dow Jones Industrial

Average lost a third of its value. Counting changes in stock price and a 68-cent-a-share quarterly dividend, Health Care REIT returned a 0.5 percent gain. Although tiny, the yield was better than those of its main competitors, shares of which lost 10 percent.

Over the past decade, shares of Health Care REIT have returned an average of 14 percent.

The only question: Can it last?

Absolutely, executives reply.

We are in very good shape. said Mr. Chapman. We think we are very well positioned for the future. Profits doubled last year to $288 million on revenues of $551 million. Normalized funds from operations a common measure of REIT performance rose a more modest 29 percent to $319 million.

The firm has 75 employees in Toledo and 125 at offices in Jupiter, Fla., and Nashville. It is one of the nation s top three real estate investment trusts specializing in health-care properties and has set its sights on the top spot.

The Toledo company is in the midst of a major shift in its property portfolio away from older, free-standing nursing homes and assisted-living facilities to what it describes as continuing care retirement communities. Translation: large campuses with apartments for active seniors, separate assisted-living buildings, nursing homes, and even outpatient surgery centers and specialty hospitals.

The firm operates no such facilities, but rather develops the projects and then acts as landlord.

Over the past three years, such complexes have risen from 28 percent to nearly a third of Health Care REIT s property portfolio. Meanwhile, its former mainstay, nursing homes, have slipped to 20 percent from 38 percent.

Real estate investment trusts are special types of companies that pay large dividends because, under federal tax laws, they are required to distribute 90 percent of income to shareholders through dividends. In exchange, the companies get tax breaks.

Health Care REIT seems to have caught an epic wave. At a time when Wall Street has soured on firms that make money from mysterious, arcane instruments like collateralized debt obligations, the Toledo company owns things that can be seen and touched. The tally: 186 assisted-living complexes, 225 nursing homes, 128 medical office buildings, and 31 hospitals.

Most of its properties are in the Southeast, Texas, Illinois, and California. Typical sites are in upscale areas like St. Simons Island, Ga., where Health Care REIT owns a large senior citizens community. It has just one property in metro Toledo, a nursing home in Swanton.

The company is not in a so-called mature industry like auto manufacturing but in promising sectors such as senior housing and health care that will benefit from the graying population.

And, in an era when corporations are being taken to task for short-sightedness, executives of Health Care REIT say they manage for the long term.

Even as financing has dried up for most real estate investments, the firm continues to supply a $1.4 billion pipeline that includes a five-story, 106-bed hospital in Murrieta, Calif., an $11 million dementia-care center in Kenosha, Wis., and 28 other projects nationwide. To finish those, the firm will spend $600 million this year and $100 million next year.

The company said that although no additional projects will be started until credit markets return to normal, it will have the cash to finish those under way.

Finance Chief Scott Estes, 38, promises that Health Care REIT will move quickly from defense to offense when the economy improves. For now, he said: We think it is a mistake to sit passively even in a tough market.

Before joining the firm in 2003, Mr. Estes was a Wall Street analyst with a reputation as a top player in the sport of platform tennis.

Health Care REIT was founded in 1970 as the financing arm of HCR Manor Care, a huge Toledo company that operates nursing homes nationwide. The two firms severed connections years ago.

Starting in the late 1970s, Mr. Chapman, a high school teacher turned lawyer, represented the company at the Toledo law firm Shumaker Loop & Kendrick. He joined Health Care REIT full time in 1992 when it had seven employees and $200 million in assets.

The Toledo company has the 10th-largest stock value of all U.S. REITs, according to a March 13 report by KeyBanc Capital Markets.

Its stock fell Friday, closing at $30.22 a share on the New York Stock Exchange. That was 44 percent off its 52-week high and 23 percent lower than at the beginning of 2009.

The firm raised more than $895 million in four stock offerings over the past year. Executives say the company s ability to raise money through stock sales reduces the need for loans, which helps it maintain a strong credit rating. It owes $2.9 billion, with no major repayments due until 2011.

The relatively high dividends of REITs typically help to keep stock prices stable and attract investors in tough times.

Financial analyst agree that the Toledo company has a strong balance sheet. Even so, analyst Jerry Doctrow, of Stifel Nicolaus, has a hold rating on its shares. In a note to investors late month, he said the firm has been one of the most consistent performers among health care REITs, has an experienced and deep management team, and a well-diversified portfolio, but faces capital demands from its development program that we believe will pressure earnings and limit its ability to pursue opportunistic investments over the next two years.

David AuBuchon, an analyst at Robert Baird & Co. in Milwaukee, sees hurdles ahead for the Toledo company and its competitors.

With retirement nest eggs damaged by cracks in the stock and bond markets, senior citizens will be less able to afford the hefty rent tabs of independent-living units. Adding to the problem is that many seniors are unable to sell existing homes, which can further complicate plans to buy or rent in retirement communities.

It s going to be pretty challenging for that independent living space to continue to maintain occupancy levels and to charge the rents they are charging, Mr. AuBuchon said.

He suspects many seniors will stay in their homes or move in with newly unemployed offspring, who probably will be more open than before to taking in parents, especially those able to help with household expenses.

Mr. AuBuchon, who is also concerned about the relatively high prices of many real estate investment trusts shares, has a hold rating on Health Care REIT.

The firm s CEO concedes that occupancy rates in its complexes have dropped slightly and that home purchases in senior complexes have fallen 20 percent.

But once the economy improves, demand is likely to improve too, he said, adding, We think these facilities will be the real plum in our portfolio.

The company plans extensive renovations at its new 160-acre campus, which Dana will exit in September for smaller offices in Maumee. Mr. Chapman declined to discuss renovation details. The move is to occur late next year.

Ohio is providing an economic development package of $14 million, including loans, tax credits, and grants. Over the next three years, about 45 new employees will join the 70 who initially will be posted there, company officials have said.

Mr. Chapman conceded that he worried that shareholders would question why a firm with a small staff, known for lean operations, needs so much space. But there has been little criticism, he added. The large campus will help with employee recruitment, allow room for expansion, and preserve an important Toledo landmark, he explained.

Contact Gary Pakulski at:gpakulski@theblade.comor 419-724-6082.



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