Since the Federal Reserve's recent announcements regarding the
"tapering" of its quantitative easing programs, thereal estate
investment trust (REIT) market has been in a tailspin.
The Dow JonesEquity REITIndex has fallen sharply since the
middle of May, as investors began to sell on fear that the REIT
market -- where profits are often tied closely to interest rates
-- is in for hard days ahead.
But investors should keep in mind that not all REITs are
While somemortgage REITs such as
American Capital Agency (
depend on the difference between short-term rates and the price
they can get for holdinglong-term debt (theyield curve ), others
makemoney by buying and leasing physical property.
This second type of REIT tends to be more stable, as the
leasing of physical assets is much less volatile than the market
for complex financial instruments.
So while the REIT market as a whole has declined in the wake
ofthe Fed 's recent announcements, REITs that invest in physical
property have in some cases suffered price drops that are based
on mostly on fear and have little to do with the value of the
The company I'm going to tell you about today makes money
byinvesting in health carereal estate . Regular SteetAuthority
readers are probably already familiar with the idea that the
growing demand for health care due to the agingbaby boomer
generation represents a stellarinvestment opportunity.
Elliot Gue, the expert behind
Top 10 Stocks
(and a recent guest on CNBC) recently recommended another health
care REIT in his Mayissue . While I can't reveal the name of his
pick out of fairness to his subscribers, I think it's worth
reprinting some of the demographic data he mentioned concerning
health care REITs in general:
The U.S. Census Bureau estimates that the population of
Americans older than 65will increase by 37% (3.2% annually)
during the next decade and that the number of U.S. residents over
75 years of age will surge by 46% (3.8% annually) in the
These favorable demographic trends should fuel demand for
space in independent-living facilities, followed by
assisted-living and skilled-nursing facilities thatoffer
increasing levels of care. While per-capita health care spending
for Americans between 65 and 75 years old is elevated relative to
younger population segments, this metric soars by roughly 70%
after the age of 75. The aging U.S. population should fuel
consumption of health care products and services.
Meanwhile,baby boomers ' investment strategies are poised to
continue evolving from a focus on accruing assets to turning
accumulatedsavings into a dependable, lifelongincome stream -- a
potential boon forshares of health care REITs and other
dividend-paying defensivestocks .
After reviewing a number of options in this sector, one in
particular caught my eye. This company boasts a "fortress"balance
sheet , a long history of rising dividends, and one of the best
management teams in the business.
HCP Inc. (
acquires and manages health care real estate and provides
financing to health care providers.
The company currently yields nearly 5% and has raised
itsdividend everyyear for the past decade. There is no reason to
suspect the future will be any different, as HCP holds littledebt
and has been increasing itsfree cash flow by leaps and
From 2010 to 2011, the company nearly doubled free cash flow,
from $276 million in 2010 to $526 million in 2011. In 2012, free
cash flow was up to $840 million, an increase of 63%.
The company'sdebt-to-equity ratio is 0.8, slightly lower than
the industry average of 0.9. Yet even after a recent $1.7
billionacquisition , the company still has plenty ofcash left
over to pay (and keep growing) dividends.
One of the key reasons for HCP's success has been its focus on
triple-net leases. Under this structure, tenants are responsible
for paying all propertyoperating expenses . These include real
estatetaxes , utilities and the cost of property upkeep. In
addition, the company has built-in protection frominflation , due
to rent payments that generally keep pace with or exceed the
In its recent $1.7 billion deal, HCP added 129 properties to
its senior housing community portfolio. These properties offer
initial leaseterms of 14 to 16 years, with theoption to extend
leases at higher rents for up to 30 to 35 years.
Long-term, steady-income generating deals like these are HCP's
specialty. Disciplined acquisition, along with a consistent
ability to create shareholder value, makes HCP's management team
hard to beat.
SinceCEO Jay Flaherty took the helm in 2002, HCP has returned
an average of 16% a year to shareholders through dividends and
capitalgains . That compares with an annual averagegain of 6% in
the S&P 500 in that time.
Best of all, after the recent market pullback, shares have
been selling at a discount. HCP shares dropped 23% between May 21
and June 20.
Yet after poring over the latest company transcripts
andfinancial statements , I haven't been able to find anyred
flags that would justify such a steep decline. Nor could I find
sufficient evidence tosupport the idea that, relative to its
peers, HCP was simply anovervalued stock that was due for
HCP is thriving and should continue to do so for years to
come. Owning and renting properties in the health care sector is
one of the safest and most stable business models in the REIT
When quality companies like HCP experience irrational price
drops, it's a good time for savvy investors to shop for
Risks to Consider:
Changes in governmental health care regulation are always a
potential concern in the health care sector. Should programs such
asMedicare andMedicaid undergo significant revisions, it could
have a negative impact on tenants'ability to pay rent or to
afford rent increases.
Action to Take -->
HCP is a great investment at today's prices for long-term,
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.