HCP is a real estate investment trust investing in real estate serving the health care industry in the United States. Because of regulations that prevent REITs from operating health care properties, HCP does not manage most of its properties, instead leasing them to operating tenants on a triple-net basis. Also, like all REITs federal regulations require HCP to pay out 90% of its taxable income in dividends. HCP has historically paid out a stable dividend.
Demand for HCP's properties, like that of all healthcare REITs, is tied to the demand for healthcare in the United States. Factors affecting demand for HCP's properties include the aging U.S. population and changing government health care legislation. On the competitive landscape, HCP is the largest healthcare REITS by value.
HCP earns its revenue by leasing properties to tenants. Because of federal regulations which prevent REITs from operating health care centers, most of HCP's properties are structured under triple net leases, where the tenant pays for all operating costs associated with the property. This minimizes HCP's operating expenses but concentrates tenant credit and vacancy risk in a smaller number of large operating tenants. A notable exception is HCP's medical office buildings (MOBs) and life science centers. Federal regulation permits REITs to operate MOBs and life science centers, and HCP actively manages these properties, collecting rents directly from tenants and paying all operating expenses. Leases on HCP's operating properties are typically signed by smaller tenants and have shorter terms than the triple net leases on HCP's investment assets. These short lease lengths lead to greater returns during boom times, as occupancy rates rise and rental rates increase more quickly than at HCP's triple net properties. However, a slowdown in the health care industry hurts these properties' revenues more, as the shorter lease lengths at operating properties enable tenants to cancel their leases or negotiate lower rental rates.
In 2009, HCP generated a net income of $109.1 million on $1.12 billion in total revenues. This represents a 74.4% drop in net income on a 0.3% increase in revenues from 2008, when the company earned $425.4 million on revenues of $1.15 billion.
The five types of properties HCP invests in are presented below:
HCP is the largest health care REIT in the United States, larger than its competitors in terms of revenues, market cap and operating properties. HCP and its competitors all operate on a national scale, and have between $300M and $1B in revenues. HCP is distinguished from its competitors by its new entrance into the life sciences sector. HCP also receives a large portion of its revenues from medical office buildings. Combined, this means HCP receives much more of its revenues from assets the company actively manages than its competitors. This increases HCP's upside potential on these assets, allowing the company to exercise operational expertise to increase earnings. It also exposes the company to operational risks, however, including decreased occupancy and declining rental rates.
HCP also receives a much smaller percentage of its revenues from skilled nursing facilities. This is significant as skilled nursing facilities usually receive a larger percentage of their revenues from government reimbursement programs than many other types of health care properties. HCP's minimal focus on skilled nursing facilities decreases the company's reliance on government reimbursements.
HCP operates in fewer states than its competitors, leaving it more open to geographic risk. The most significant of these risks are changes in state Medicaid reimbursement rates, which have been fluctuating especially at the state level.