Out with the Old
While HCP has made major acquisitions, it has also aggressively
sold off aging assets and properties whose operators rely heavily on potentially unpredictable government reimbursements,
particularly nursing homes at the mercy of Medicaid. As a result,
HCP’s portfolio currently contains only 25 percent of the properties the company owned in 2003.
The combination of selling assets and equity has allowed HCP
to maintain a fairly conservative balance sheet, even during its
spate of deals. Last year, HCP reduced its leverage to its lowest
level in five years, boasting a debt-to-market capitalization ratio
of 43 percent.
The company’s transformation hasn’t gone unnoticed. As of
early June, HCP shares traded at roughly $30 a share, which
represented a premium of about 40 percent relative to net asset
value, according to Green Street. The rest of the sector averaged
a premium of about 32 percent.
For the one-year period ended May 31, HCP’s total return
was up 46.3 percent, compared to a gain of 45.5 percent in the
F TSE/NAREIT Health Care REIT Index. In the first quarter
of 2010, HCP shares gained approximately 10 percent, compared
to a 7 percent increase in the sector index.
The Positive Impact of Health Care Reform
HCP and its peers are expected to benefit from an anticipated
spike in demand for health care, fueled by the aging of the Baby
Boom generation. Likewise, the health care reform legislation
signed into law this spring will result in an estimated 32 million
more Americans getting coverage, according to a Green Street
report on the impact of health care reform.
“Health care reform won’t be some massive windfall for
anybody, and there is still a lot that needs to be understood. In
general, though, it is positive for health care REITs. They are in a
business that is getting larger, albeit there is also a push to reduce
the profitability of those in the business,” explains John Arabia, a
managing director at Green Street.
REITs that will likely benefit most from health care reform
are those that own medical office build-
ings and lab space, Green Street reports.
Expanded insurance coverage is likely to
boost profits and growth opportunities
for pharmaceutical companies. It will
also fuel demand for medical office space,
along with drastically reducing losses suf-
fered by hospitals as a result of treating