HCP, Inc.’s (NYSE:HCP) Chairman and CEO Lauralee Martin discussed the impacts of rising rates, international investment opportunities, competitor Ventas (NYSE: VTR) and other potential headwinds facing healthcare-focused real estate investment trusts in 2014 in a interview with Seeking Alpha.
The former executive at Jones Lang LaSalle (JLL) assumed her leadership role at HCP following the October termination of the REIT’s former Chairman and CEO James Flaherty. In her 13-year tenure at JLL, Martin’s experience included roles as the company’s Chief Financial Officer as well as Chief Operating Officer.
HCP’s new CEO offered insight regarding what’s on the horizon for the company in 2014, such how the REIT’s operating portfolio will be impacted by rising rates this year.
Though a large majority of HCP’s investments are structured as triple-net leases, making the REIT susceptible to higher rates, there are several aspects of the company’s portfolio that can benefit from rising rates and economic growth, said Martin.
“Our portfolio behaves like a ‘growing annuity’ with contractual rent increases each year well above current inflation, and roughly 25% to 30% of our rent growth has ties to CPI increases,” Martin told Seeking Alpha. “In addition, a more robust economy drives growth for our Medical and Life Services Office platform, which represents nearly one-third of HCP.”
Martin also discussed diversification strategies of HCP for 2014, specifically if the company had any plans to invest internationally in Canada and Europe during her tenure as CEO.
HCP has been active abroad, Martin said, investing over $400 million in the UK and taking advantage of its own debt investment platform within the company’s “5×5 model.”
“We believe there are attractive opportunities in international markets, but they need to be evaluated appropriately on a risk adjusted return basis.”
The CEO even acknowledged the key differences between HCP and its largest competitors, Ventas and Healthcare REIT (NYSE:HCN)
“We recognize and respect both Ventas and Healthcare REIT as our peers,” Martin said. “We have chosen to pursue several strategic and execution differences from them.”
These differences that set HCP apart from its competitors, according to Martin, include components such as the REIT’s 7.5 million square-foot Life Science portfolio, as well as the company’s heavy focus on Funds Available for Distribution (FAD), rather than Funds From Operations (FFO).
“AFFO [adjusted funds from operations] or FAD is not a standardized metric, which makes it more difficult for investors and analysts to perform relative valuation,” she said. “However, as I just mentioned we believe FAD is a much better measure of cash flow and thus ability to sustain dividends and dividend growth. Investors should demand consistent transparency.”
Written by Jason Oliva