This article is about the company, for the healthcare REIT industry, see the industry page on REIT - Healthcare
HCN is an equity based Real Estate Investment Trust that focuses on health care properties. Because of federal regulation that prevents REITS from operating health care centers, HCN contracts with third party managers to run its investment properties, which include skilled nursing facilities, senior housing and acute care hospitals. However, over the past two years HCN has focused on establishing its medical office buildings (MOB) portfolio. Because it manages as well as owns these operating assets, HCN has greater control over the returns on its investment and revenue potential.
When it manages medical office properties, HCN is more exposed to a downturn in the economy, since leases on HCN's operating properties are typically with smaller tenants and have shorter terms than the triple net leases on HCN's investment assets. These short lease lengths lead to greater returns during boom times, as occupancy rates rise and rental rates increase more quickly, but a slowdown in the health care industry would hurt as tenants typically have less credit than large tenants at investment properties, leading to greater probability of default.
HCN earns revenue at all its properties by leasing space to health care companies. Because leases with fixed rental rates usually last at least five years at operating properties, and a decade or longer at investment properties, HCN focuses on expanding its portfolio in order to grow revenues.
HCN's acquisitions of Windrose and Paramount represent a new growth strategy for the company, shifting from a real estate owner to a real estate operator. This shift reduces HCN's dependence on large tenants who lease entire centers, diversifying the company's tenant base. By operating its MOBs HCN is also able to exercise its operational expertise to increase the performance of its MOB portfolio. However, HCN's management of its MOB assets exposes it to the risks of an operator, including decreased occupancy, increased operating expenses and declining rental rates.
The company's skilled nursing facilities, otherwise known as nursing homes, provide long term care, primarily for elderly patients, that do not require the extra services of an acute care hospital. Its independent and assisted living centers are both senior housing communities, houses or condominiums for seniors which provide access to on premise health care, have support staff on call, and offer various levels of community activities for its senior residents. They are divided into independent and assisted living facilities based on the level of support they provide. Many senior housing facilities are private pay assets, they do not accept or are not eligible for government reimbursement. Many practitioners in MOBs also do not accept government reimbursement as payment. In contrast, most skilled nursing facilities and hospitals do accept government reimbursement.
Like all REITs HCN is subject to a federal requirement that it pays out 90% of its taxable income as dividends.
In 2009, HCN generated a net income of $171.2 million on revenues of $569.0 million. This represents a 34.2% decrease in net income on an 8.1% increase in total revenues from 2008, when the company earned $260.1 million on revenues of $526.4 million.
HCN operates through two business segments.
All of HCN's competitors operate on a national scale, and have between $300M and $1B in revenues. Skilled nursing facilities make up a greater portion of HCN's revenue than either Health Care Property Investors (HCP) or Ventas (VTR). Because these facilities usually receive a larger portion of their revenues from government reimbursement programs, this exposes HCN to more government reimbursement risk.