As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO). Over the past decade FFO has increased by 3% on average. The fund has a diversified portfolio of healthcare properties by tenants, type of asset or geography. The major tenants include Sunrise Senior Living, Brookdale Senior Living, HCA, Tenet Healthcare, HCR ManorCare, Covenant Care In addition to that the trust has approximately 14% of total assets invested in debt issued by high-quality healthcare operators, secured by their real estate, rather than in the real estate itself.
The company’s focus on senior living facilities should benefit from increasing demand by retiring baby boomers. There will be a significant increase in the number of people over the age of 65 in the US over the next decade, which would be beneficial to overall healthcare facilities.
The company’s assets produce a relatively stable stream of income, which is predictable and resilient in times of recessions. There won’t be much growth however asides from general rate increases on its leases, unless management starts acquiring more properties. The trust routinely disposes or acquires properties in order to enhance shareholder value.
One warning statistic is the fact that average occupancy percentage for Senior Housing has dropped from 95% in 2005 to 86% in 2009. This occupancy ratio represents occupancy and unit/bed amounts as reported by the respective tenants or operators. Certain operators in HCP Inc’s hospital portfolio are not required under their respective leases to provide operational data however
In terms of lease expirations, only Medical Office properties face a steep expirations cycle of leases until 2014. For Senior Housing segment, there aren’t any major lease expirations until 2016.
The company doesn’t face any major debt maturities until 2013, when it has a total of $1.225 billion in Mortgage debt and senior unsecured notes maturing.
Analysts expect FFO to reach $2.15 and $2.24 for 2010 and 2011 respectively. HCP Inc’s leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Substantially all of their senior housing, life science, and skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs.
Over the past decade distributions have increased by 2.50% per annum. A 2.5% annual growth in distributions translates into dividends doubling every 29 years. In 2009 the company raised quarterly distributions by 1.00%.
As a Real Estate Investment trust HCP, Inc. must make distributions to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. The FFO payout ratio is at 86%, which was the first increase in this indicator since it exceeded 100% in 2003. Overall a lower FFO payout is preferable, as it minimizes the effect of short term fluctuations in rental incomes on the distribution rate.
Overall I find HCP Inc an attractive company for investment, with a business model that generates stable income streams in the healthcare field. I like the low Price/FFO ratio of 15, which is one of the lowest in the past decade. I would not expect much growth in funds from operations and distributions above the rate of inflation however. I own two Real Estate Investment trusts dealing with retail properties on a triple net lease terms, so adding a healthcare related REIT would add to diversification in my portfolio.
I plan on adding a small position in HCP Inc. on dips over the next month. My ideal starter yield however would be 6%, indicating an entry price of $31 however. I would not settle for a current yield of less than 5% on this investment however.
Full Disclosure: None
Dividend Growth Investor