HCP: Real Estate for the Expanding Healthcare Sector

The company also seeks to reduce risk through portfolio diversification by segment, geography, operator, tenant, and investment. HCP has one of the largest and most diversified property portfolios. California accounts for 21% of operating income, followed by Texas at 10%.
The five property segments are senior housing (37% of income), post-acute/skilled nursing (31%), life sciences/scientific research (14%), medical office buildings (13%, primarily on hospital campuses), and hospitals (5%). Brookdale Senior Living is the largest operator of HCP’s senior housing properties, which include assisted living, independent living, and continuing-care retirement communities. HCR Manor Care is the largest operator of HCP’s post-acute/skilled nursing facilities, which provide restorative, rehabilitative, and custodial nursing care for people who do not require more extensive treatment from hospitals. Medical office buildings typically require more advanced electrical and mechanical systems than regular office buildings. Life Sciences properties typically include lab and office space for biotech and pharmaceutical companies, with 89% of the properties located in San Francisco and San Diego, two of the top three markets for that business.

HCP also tries to mitigate the risk of rising interest rates, because real estate companies are significant borrowers. HCP seeks to reduce its exposure to rising rates primarily by using fixed-rate borrowings with staggered maturities.
The company’s chief executive is a woman, and 28% of executives at the VP level or above are women. Six of seven directors are independent, and there is a separate board chairman from the CEO. HCP is a signatory to the Carbon Disclosure Project and was ranked #1 the past three years by GRESB (the Global Real Estate Sustainability Benchmark). It has set clear targets for reducing GHG emissions, primarily through reduced electricity use. Nearly 10% of its portfolio consists of properties that are Energy Star or LEED certified.
HCP’s history is particularly impressive. The stock is an S&P 500 “Dividend Aristocrat,” with 29 straight years of dividend increases. The current dividend yield is a relatively high 5.0%, but since HCP is structured as a REIT and not a regular corporation, the dividend is “nonqualifying” for income tax purposes and is taxed at ordinary income rates.
The stock has had an excellent record since it went public in 1985, producing a compound annual total return from dividends and capital appreciation of 15.7% as of 6/30/14. Its cash flow (funds available for distribution, or “FAD”) grew 10.1% annually over the past three years. We expect growth in cash flow and the dividend of about 5% annually, for total return potential of 10% (5% starting dividend yield, 5% annual growth). Our initial price target for the stock is $45.25.

HCP Inc.

Revenues: $2.2 billion
Cash Flow Per Share (Funds From Operations):
2014 est. $3.05
2015 est. $3.20
Projected 3–5 Year Annual Dividend Growth: 5%
Dividend Yield: 5.0%
Stock 52-week Low–High: $35.50–$44.59
Price/FFO (2014): 14.2
Risk: Below average
Website: http://www.hcpi.com