In addition, the company operates a Hospital segment which generates around 6% of portfolio income. The image below gives a breakdown of tenants and total portfolio income from each primary segment.
Source: June 2016 NAREIT Presentation, slide 6
The image above shows HCP’s income by segment after its proposed spin-off. The company is spinning off its ManorCare assets into a new business. ManorCare operates in the post-acute and senior care real estate industry.
ManorCare makes up around 20% of HCP’s income currently. The details and rationale for this spin-off are discussed in greater detail in the growth section of this article.
In total HCP operates a portfolio of more than 1,000 properties in the United States and the British Isles.
Growth Prospects
HCP has grown dividends at 3.2% a year from 2006 through 2015. Funds from operations (hereafter abbreviated as FFO) per share grew at 5.3% a year over the same time period.
Investors should not expect rapid growth from HCP. The company pays out the majority of its earnings as dividends. This leaves less to reinvest for growth.
HCP grows by investing capital it raises from both debt and equity markets. From 2006 to 2015, total share count grew by 9.9% a year. Long-term debt grew at 6.9% a year over the same time period.
The company has favorable long-term macroeconomic growth drivers…
The aging ‘Baby Boomer’ generation means rising health care costs – and more senior housing facilities. This bodes well for HCP.
Rising health care costs in general are good for HCP’s clients. This in turn provides growth for HCP as its clients need more hospitals and buildings.
But not everything is positive at HCP…
The company’s ManorCare assets (2) are performing poorly.
Changes in payer mix from Medicare to Managed Care plans have reduced both billing rates and number of patients to post-acute/skilled nursing facilities. This has caused ManorCare to struggle.
ManorCare barely covered its fixed costs in HCP’s most recent quarter. The company’s fixed charge coverage ratio was 1.03 in the quarter.
HCP’s management has responded by isolating the problem – and removing it. ManorCare will be spun-off (3) to shareholders of record as of October 24th. Shareholders will receive 1 stock of Quality Care Properties (the name of the ManorCare spin-off) for every 5 shares of HCP stock.
The new business will be structured as a REIT… But it is unlikely the spin-off will be able to pay (or at least maintain) a dividend once it is spun-off.
The question for HCP shareholders: Is the dividend safe?
The short answer is, yes. The company generated $0.74 of adjusted FFO per share in its most recent quarter. HCP pays dividends of $0.575 per share. The dividend is still well covered by FFO.
Competitive Advantage & Recession Performance
While HCP’s ManorCare division has struggled, there’s no doubt the company as a whole has a strong and durable competitive advantage. The evidence is its 31 consecutive years of dividend increases.
HCP’s competitive advantage comes from its size. The company’s large size (it has a $16.9 billion market cap) allows it to diversify its health care properties.
Smaller REITs are less diversified, and more subject to risks from individual deals.
HCP also protects itself by entering into beneficial contracts with tenants. The company locks customers into contracts that specify rent increases throughout the life of the contract. This helps HCP to grow (slowly) over time.
The Great Recession was a difficult time for the real estate industry in general. Despite this, HCP performed well during this difficult period. The company’s focus on the more stable health care industry is largely responsible for its better performance.
When recessions hit, health care still takes priority. This allows HCP’s tenants to keep paying regardless of the overall economic climate.
HCP’s FFO-per-share through the Great Recession and recovery is shown below to show how little the company was affected by the recession.
– 2007 FFO-per-share of $2.14 (high at the time)
– 2008 FFO-per-share of $2.25 (new high)
– 2009 FFO-per-share of $2.14 (recession low)
– 2010 FFO-per-share of $2.18 (beginning of recovery)
– 2011 FFO-per-share of $2.37 (new high)
