Healthcare REIT: Dividend artisocrat

by Carla Pasternak, editor High Yield Investing

Our latest high yield security of the month is HCP (HCP) was organized as a REIT in 1985; it now owns a $19 billion portfolio of healthcare properties.

HCP has provided 27 straight years of dividend hikes (even during the 2008 recession) and 10% annual average returns for the past decade and a half.

The portfolio is highly diversified in more than 1,000 different facilities in 46 states across five different healthcare markets: senior housing, life sciences (research labs), medical offices, skilled nursing, and hospitals.

Tenants are under long-term leases and average occupancy rates range between 85% and 90% (except for hospitals).

Revenues are largely from private sources, leaving the trust relatively unexposed to the vagaries of government reimbursement programs such as Medicare and Medicaid.

I didn't discover this high-yield play. Standard & Poor's spotted it first and awarded it the distinction as the only real estate investment trust (REIT) in the exclusive S&P 500 High-Yield Dividend Aristocrats index.

This index has only 60 components, every one of them an exceptional dividend grower. In fact, they are the highest-yielding stocks in the S&P 500 that have raised their dividends every single year for at least a quarter of a century.

This aristocrat carries a yield of nearly 5%. That isn't puny in today's record low-yield markets. But today's yield isn't what's important. It's what your yield on these shares will be five or six years from now that counts.

If the dividend keeps growing at the same 2.4% rate it's grown over the past five years, your yield will be closer to 6%.

This dividend stalwart is a safe haven in a crazy market, not just because it promises a rising income stream. Total returns are exceptional.

The shares trumped the S&P 500 for every time frame over more than a decade. And they've not only out-performed the overall market, they're also about 15% less volatile.

The trust generates rental revenue by leasing properties under long-term leases. Rental revenues throw off a predictable revenue stream of $1.4 billion annually. In addition, the trust derives $3.6 million annually through 2017 from financing arrangements on some properties.

Four tenants, all in the senior housing portfolio, accounted for about 55% of total 2011 revenues. Newly acquired HCR ManorCare contributed 32%, followed by Brookdale Senior Living (10%), Emeritus Corp. (7%), and Sunrise Senior Living (6%).

The trust continually buys and sells properties to manage the value of its portfolio. In 2011, it spent about $7 billion on senior housing, medical office and life science acquisitions.

With $7.7 billion in total debt and $1.5 billion in EBITDA, the company is leveraged about 5.1 times. That's considered sustainable, helping make HCP one of only a select few healthcare REITs with a solid investment-grade rating on senior unsecured debt of "BBB" from Standard & Poor's.

HCP management has grown earnings per share at an average pace of 19% a year for the past three years, mainly through acquisitions and property development.

Looking ahead, analysts see same-property income continuing to grow at the historical pace of 2% to 4% for the next few years, thanks to rent escalator clauses built into the lease contracts.

In addition, growth will be driven by acquisitions and development projects. Specifically, FFO per share is expected to advance to $2.77 in 2012 and $2.95 in 2013 from $2.19 in 2011.

These projections leave ample room for continued distribution increases from the current rate of $2.00 per share.

A risk to consider, however, is that a bigger-than-expected decrease in government reimbursement rates for Medicare and Medicaid or a radical shift in healthcare reform legislation could impact cash flows.

Action to Take --> An exceptional dividend growth record and a solid investment-grade credit rating make this shareholder-friendly company an attractive investment idea.

At 16 times funds from operations, HCP is trading in line with its healthcare REIT peers and is reasonably priced for new money.

The company sponsors a dividend reinvestment and direct purchase plan. Information is available at 562-733-5309.

Learn more about this financial newsletter at Carla Pasternak's High Yield Investing.

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