Lowering the Rent Shouldn't Hurt This Health-Care Landlord
HCP remains one of the most attractive REITs we cover.
HCP (HCP) remains one of the most attractive U.S. real estate investment trusts we cover on a price/fair value estimate basis. After its announcement earlier this week that it has agreed to reduce the rent on its largest tenant, HCR ManorCare, we are maintaining our $51 fair value estimate and narrow Morningstar Economic Moat Rating. We also expect HCP to sustain its dividend in 2015 and to continue raising it annually, like it has for the past 29 years.
The move to reduce HCR ManorCare's rent by $68 million a year combines with HCP's previously announced plan to sell 50 HCR-operated facilities to address substandard rent coverage. Despite the lower rent payments, though, HCR ManorCare's rent coverage remains below comfortable levels, in our opinion. Also, there remains a mismatch between the annual rent growth escalators near 3% and the lower growth rate we expect in government reimbursement for the services provided by the majority of HCR ManorCare facilities. As such, while this deal largely removes any immediate risk of further changes to the HCR ManorCare relationship, there are longer-term risks concerning its tenant exposure.
Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.