Significant changes are an understandable source of concern for investors. However, HCP’s decision to spin off both its skilled nursing facilities and its assisted living facilities should not be interpreted in a negative light. After all, it promises to boost its financial performance by reducing its risk for its investors, which is what its management should be seeking under the current circumstances.
In short, the U.S. government has become more and more concerned about rising healthcare costs in recent times, which in turn, has prompted more and more scrutiny of the healthcare sector. Unsurprisingly, this has resulted in the detection of more and more cases of wrongdoing, which has sent tremors running through investors with investments in healthcare REITs reliant on government reimbursements.
HCP has had its multiples brought below the healthcare REIT average by these incidents involving one of its most important tenants, HCP ManorCare. Last year, the U.S. Department of Justice accused HCP ManorCare of requesting government reimbursements to which it was not entitled. This February, HCP announced impairments due to the tenant’s poor performance.
While HCP might not be able to predict the repercussions of the U.S. Department of Justice claims, its status as a large cap REIT with an investment grade rating provides muscle power to contain it. Even after the spin-off, the REIT will remain large.
HCP’s new portfolio will be equivalent to 73 percent of the total revenues, coming from senior housing, life science, and medical offices, thus ensuring the stable revenues from private pay sources that are most attractive to investors who want to earn an income while also playing it safe. In contrast, the spun-off portfolio of both skilled nursing facilities and assisted living facilities will bear the higher risk, and potentially higher rates of return, thus ensuring its appeal to investors who are more willing to take a chance.
Summed up, HCP’s decision is a sensible one that will make its portfolio safer by divesting its sources of risk, thus putting it in an excellent position to reach parity with other healthcare REITs.
Source: HCP, Inc.(NYSE:HCP), Fast Graphs
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