HCP: Growth Plus Attractive Dividends
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The range of real estate investment trust – REIT – stocks allows investors to focus on specific sectors of the commercial real estate market. HCP (NYSE: HCP) is currently the largest REIT company covering the healthcare sector. This stock has recently performed very well for shareholders and there is plenty of long term potential in this corner of the real estate market. REIT stocks also provide investors some diversity against the corporate stocks which base their revenues and earnings on different sets of factors.
The HCP portfolio of properties is one-third skilled nursing facilities, one-third senior housing communities, 15% life science buildings, 14% medical office buildings and 6% in hospitals. The portfolio has grown from the ownership of a single hospital in 1985. The company currently owns just over 1,000 properties in 46 states. HCP differs from its major healthcare REIT competitors with higher percentages of life science and medical office buildings in the portfolio. The competitors have higher portions of senior housing communities in their portfolios. In addition to the ownership and leasing of healthcare properties, HCP generates revenue through joint venture agreements, property development and debt investments. In April of 2011 the company completed the $6.1 billion acquisition of the real estate portfolio of HCR ManorCare, moving HCP up to the top of the healthcare REIT companies measured by market capitalization. The ManorCare deal includes the lease back of the properties to HCR ManorCare with guaranteed 3.5% annual lease rate increases for the next five years.
The two major healthcare competitors to HCP are Ventas (NYSE: VTR) and Health Care REIT (NYSE: HCN). These three are the only companies in the sector with market caps greater than $10 billion. At the end of 2011, HCP settled a lawsuit which was filed by Ventas in 2009 claiming interference by HCP in an acquisition by Ventas. HCP ended up paying Ventas $225 million to settle the suit. In 2011, Health Care REIT also aggressively purchased additional properties, doubling the value if its portfolio over the course of the year. For the last two years the stock returns of the three REIT companies have been very similar. The three stocks produced gains of 25% to 30% for the period and dividend earnings of about 5% per year.
The healthcare REIT stocks – with HCP at or near the top of the list – present very attractive prospects for long term growth. The aging U.S. population points to an ever increasing need for more skilled nursing facilities and senior housing properties. These two types of properties represent the bulk of the growth potential. HCP has also done a better job of developing medical office and life science use properties, diversifying the company portfolio. The total value of healthcare related real estate in the U.S. is over $1 trillion. The dozen or so healthcare REIT companies own just a fraction of that total. HCP can generate growth through steady lease rate increases, the acquisition of existing properties and the development of new healthcare facilities. The company is active in all three with the goal of steady and attractive from of net funds available for distribution and a resulting growing dividend rate.
Motley Fool newsletter services recommend Health Care REIT. The Motley Fool has no positions in the stocks mentioned above. StockCroc1 has no positions in the stocks mentioned above. 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.
