Grubb & Ellis Co., says HCP “generally leads the pack” and
often pioneers trends in the industry.
HCP is “who we aspire to be as we grow our asset base,” adds
Prosky, who manages the recently launched Grubb & Ellis
Health Care REI T II, a non-traded REIT seeking to raise $3.3
billion in equity.
HCP went public in 1985, when its holdings consisted of two
acute-care hospitals and 20 nursing homes. Today, it is not
only the largest health care REIT in the country, with assets of
more than $13 billion, but also the most deeply diverse. Its 675
properties in 42 states span five sectors—senior housing, life
sciences, medical office buildings, hospitals and skilled-nursing
facilities—and the company is a landlord to some of the top
names in those businesses.
“With one exception, life science, if you took the company
and broke it into four health care REITs, those four would be
the largest REITs in their space, and life science would be the
second-largest,” Flaherty says.
Overall, HCP is the country’s seventh-largest REIT, as measured by its approximately $10 billion market capitalization, and
in 2008 became the first health care REIT to be added to the S&P
500 stock index. Last year, the company generated revenues of
nearly $1.2 billion and through year-end had produced a 16 percent
compounded annual total return to shareholders since its IPO.
A New Model: 5x5
Shortly after becoming CEO, Flaherty worked to revamp the
company’s board and management team.
Paul F. Gallagher, a former managing director in the real estate
division of GE Commercial Finance, joined HCP as executive
vice president for portfolio strategy in 2003 and was promoted
three years later to become the company’s first-ever chief investment officer.
Flaherty looked outside the world of health care real estate to fill seats on the board, bringing in corporate leaders
such as David Henry, CEO of Kimco Realty Corp. (NYSE:
KIM), and Richard M. Rosenberg, the retired CEO of
“We wanted folks who could think about this (company) more
as an institutional business, because the model was going to
change,” Flaherty says.
HCP AT A GLANCE
3760 Kilroy Airport Way,
Long Beach, CA
James F. Flaherty III:
chairman, president & CEO
Thomas M. Herzog: CFO
Paul F. Gallagher: CIO
Flaherty and his team developed a business model based on
the successes of leading REITs in retail, office and other sectors
that have been forced to compete with institutional investors.
The result was a “five-by-five” model that has kept HCP nimble
as it has grown.
Under the model, HCP only invests in five property sectors.
Additionally, it chooses from among five different investment
strategies—properties leased to third parties; debt investments; developments and redevelopments; joint ventures and
HCP has acquired more than $1 billion worth of property
through DownREIT transactions, whereby sellers contribute
property to DownREITs in exchange for units in the REITs.
The transactions allow sellers, who can eventually exchange their
DownREIT units for HCP shares or redeem them for cash, to
transfer real estate in a tax-efficient manner.
The model has resulted in a level of diversity that reduces
exposure to any one property sector and allows HCP to benefit
from broad trends in health care—from the anticipated higher
demand for senior housing fueled by aging Baby Boomers to the
shift toward outpatient treatment that has pushed up demand for
medical office buildings.
By choosing from among different investment vehicles,
HCP can change course depending on market conditions. Additionally, the company can stimulate its earnings with opportunistic investments and supplemental revenue, including fees
that it collects for managing joint ventures with institutional
Through joint ventures, HCP has been able to team up with
big institutional investors with a lower cost of capital, rather than
always competing with them for acquisitions. In 2003, it formed
a joint venture with GE Commercial Finance to make its first
major acquisition of medical office buildings. The two purchased
113 medical office properties in 16 states from a division of
HCA, one of Flaherty’s clients when he headed Merrill Lynch’s
Global Health Care Group.
Another major acquisition took place three years later, when
HCP bought Orlando, Fla.-based CNL Retirement Properties
Inc., a REIT that owned independent, assisted-living and con-tinuing-care communities and medical offices. The $5.3 billion
acquisition doubled the size of HCP’s portfolio. The company
has since put $2 billion worth of those assets into a joint venture
with large pension funds and other institutions.
In 2007, HCP blazed a trail for health care REITs by entering the life science sector in a big way. It spent nearly $3 billion
to acquire Slough Estates USA Inc., a leading biotech property
developer in the San Diego and San Francisco markets. The acquisition gave HCP a life sciences development platform as well
as a portfolio of 83 properties leased to tenants including Amgen,
Genetech and Pfizer Inc.
“Having a diversified portfolio positions HCP to be able to
benefit from the broad health care market and stay away from the
potential potholes,” says Paul A. Ormond, president and chief
executive officer of HCR ManorCare.