A Health Care REIT Capitalizing on the Aging Population of the United States

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A leading health care real estate investment trust, HCP Incorporated(NYSE: HCP) has only risen 6.36% so far in 2013, more than 10% short of the return provided by the Dow Jones Industrial Average.  

HCP is a real estate investment trust invested in property primarily servicing the health care industry. Senior housing, post-acute/ skilled nursing, life science, medical offices, and hospitals are the company’s main breeds of property holdings. Based on market capitalization, HCP is valued at $21.83 billion. Fundamentally, the company's business model is strong, with a TTM profit margin of 44.29%.  

With the company trading within $8 of all-time highs, should investors bet on this old timer, or should they stay away from this aging investment?    

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Strengths: 

  • Institutional Vote of Confidence: 98.36% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future.

  • Dividend: Currently, HCP pays out quarterly dividends of $0.525, which, when annualized, puts the dividend as yielding 4.35%, a major strength for long-term investors.

  • Explosive Revenue Growth: In 2003, HCP reported revenue of $400 million; in 2012, the company announced revenue of $1.90 billion, representing year over year annual growth of 18.90%, a strong trend that is anticipated to continue into the future with projections placing 2014 revenue at $2.19 billion. This growth has been a result of aggressive reinvestment by the company into new properties.

  • Solid Assets Growth: Assets have grown from $3.03 billion in 2003 to $19.91 billion in 2012; this trend of solid assets growth is a major strength and represents a strong and growing company.

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  • Diversified Portfolio:HCP holds a diverse portfolio of properties including senior housing, post-acute/ skilled nursing, life science, medical offices, and hospitals, and with this diversified portfolio comes a greater level of security and predictability for investors.

  • Necessity of Health Care: A distinctive quality of the company’s holdings, health care is a necessity as there will always be a demand for the types of properties HCP owns, providing investors with an increased level of predictability.

Weaknesses: 

  • Relatively High Volatility:Presently, HCP possesses a beta ratio of 1.12, representing a company trading with slightly more volatility than the overall market.

  • High Valuation: At the moment, the company carries a price to earnings ratio of 24.65, a price to book ratio of 2.06, and a price to sales ratio of 11.48, all of which indicate a company trading with a relatively high valuation.

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  • Net Debt: The company’s $247.67 million of cash and cash equivalents on their balance sheets is outweighed by the $8.69 billion in debt the company possesses, representing a net debt of $8.44 billion, a major weakness in the business.

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Opportunities: 

  • Improvement in Occupancy Rate:2007 to 2011 Occupancy Rates (senior housing: 91%-86%, post-acute/skilled nursing: 87%-87%, life science: 82%-90%, medical office: 91%-91%, hospital: 59%-52%); any improvement in occupancy rates could increase income and strengthen the company’s pricing power.

  • Dividend Growth: Since implementing their dividend program in 1990, HCP has consistently raised their dividend payouts, and is highly anticipated to do so into the future.

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  • Property Count Growth:From 2007 to 2011, the number of senior housing units has increased 11,511; the number of post-acute/skilled nursing beds has increased 36,778; the number of life science square feet has increased 710; the number of square feet of medical offices has increased 101; and the number of hospital beds has increased by 32.  Any further property count growth could present opportunity for growth.

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  • Upcoming Wave of Retiring Baby Boomers:The US population that is 65 years or older has been increasing since 1980, and with the upcoming wave of retiring baby boomers the company’s senior housing segment should prosper.

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Threats: 

  • Competition in Acquiring Quality Properties: Quality properties are prime real estate, and there is stiff competition to acquire them, which can lead to margin contraction for the company if they overpay for a property.

Competitors: 

Major publicly traded competitors of HCP include Brookdale Senior Living Incorporated(NYSE: BKD), Health Care REIT Incorporated(NYSE: HCN), National Health Investors Incorporated(NYSE: NHI), and LTC Properties Incorporated(NYSE: LTC) 

Brookdale is valued at $3.57 billion, does not pay out a dividend, and carries a negative price to earnings ratio. Brookdale is an owner and operator of senior living communities throughout the United States, and competes directly with HCP. Fundamentally, the company's business model is weak, with a TTM profit margin of -1.85%.   

Health Care REIT is valued at $19.45 billion, pays out a dividend yielding 4.53%, and carries a price to earnings ratio of 274.15Health Care's portfolio spans across nearly all breeds of health care real estate properties. Fundamentally, the company's business model has been substantially weakening over the past 5 years, with the company's TTM profit margin declining from the 60% level to the current 15.29% mark    

National Health is valued at $1.76 billion, pays out a dividend yielding 4.66%, and carries a price to earnings ratio of 24.42. The bulk of National Health's portfolio is comprised of long-term care and senior housing facilities. The company's business model is incredibly strong with a TTM profit margin of 89.45%.   

LTC is valued at $1.37 billion, pays out a dividend yielding 4.44%, and carries a price to earnings ratio of 26.60. LTC's real estate portfolio consists of mainly senior housing facilities, with its properties competing with HCP's and the other competitors' holdings. Fundamentally, the company's business model is proven and solid, with a TTM profit margin of 52.90%.   

The Foolish Bottom Line

Financially, HCP is relatively solid. The company possesses a proven track record of consistent and solid revenue growth, a growing dividend, and a diversified property portfolio. Despite the company’s high valuation and net debt position, the company’s business model is extremely predictable and sustainable. Looking forward, the company is likely to sustain its rate of growth by reinvesting in its business through cash flow generated through its properties. All in all, HCP earns five out of five stars, and is an extremely stable investment that should hand investors returns that outperform the overall market for years to come.

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Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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