HCP. Inc. (HCP): Healthcare REIT with a 4% Yield

By J. Royden Ward, Editor of Cabot Benjamin Graham Value Investor
From Cabot Wealth Advisory 5/27/13 Sign up for free Cabot Wealth Advisory

HCP. Inc. (HCP), formerly Healthcare Property Investors, is a real estate investment trust (REIT) started in Long Beach, California, in 1985. HCP invests in real estate serving the healthcare industry throughout the U.S. The company’s portfolio of assets includes senior housing, post-acute/skilled nursing and life science facilities, medical offices, and hospitals.

The trust primarily generates revenue from long-term leases of its various properties. Most of HCP’s rents and other earned income from leases are received under triple-net leases or leases that provide for a substantial recovery of operating expenses. A triple-net lease, or NNN, requires the tenant to pay all taxes, insurance, and maintenance on a property.

HCP recently acquired 129 senior housing communities for $1.7 billion. Located in 29 states, the company’s portfolio includes 10,077 units representing a diversified mix of 61% assisted living, 25% independent living, 13% memory care and 1% skilled nursing. The purchase is expected to add noticeable EPS (earnings per share) in 2013. In addition, projects under development will continue to come on line in 2013.

At 18.5 times current FFO (funds from operations), HCP shares are very attractive. FFO is defined as net income (earnings), minus depreciation and amortization. Most REITs use FFO as a measure of income, because their real estate holdings tend to increase in value over time rather than decrease.

HCP recently increased its dividend by 5%; it now provides a hefty 4.0% yield. HCP has increased its dividend every year for the past 28 years. HCP is the only REIT included in Standard & Poor’s elite list of Dividend Aristocrats. The dividend is well-covered by EPS–75% is well below the REIT industry standard of 90%. I think HCP can be bought right now.

My Minimum Sell Price is 66.15. 

I will continue to follow HCP, as well as many other undervalued, high-quality companies in my Cabot Benjamin Graham Value Investor. For more information, click here.