HCP Defends $163 Million Medical Office Building Purchase

HCP, Inc.’s (NYSE: HCP) fourth-quarter 2016 earnings might have beaten analysts’ expectations, but their recent medical office activity has confounded some analysts.

The Irvine, California-based health care real estate investment trust (REIT) is getting some flack from analysts for its recently announced acquisition of 10 medical office buildings from Community Health Systems, Inc. (NYSE: CYH).

The $163 million purchase “flew in the face a little bit with the idea of being low-risk,” Richard Anderson, an analyst with Mizuho Securities USA, Inc., said during HCP’s fourth-quarter earnings call on Monday. Still, HCP maintained the acquisition was beneficial.

The 10 buildings HCP bought from Community Health Systems are purpose-built, good quality medical office buildings that are primarily on-campus and strategic to their affiliated hospitals, HCP President Justin Hutchens said on the earnings call. Those are only some of the reasons why HCP feels the purchase was advantageous.

“While these assets are guaranteed by CHS the parent, what we found really attractive with them was the fact that they’re master-leased by the affiliated hospitals associated with the buildings,” Thomas Klaritch, HCP’s senior managing director, medical office properties, said on the earnings call. “As you know, it’s increasingly rare to see master leases on asset purchases and we really felt that the returns were much more attractive with these leases in place.”

Additionally, the hospitals that are affiliated with the 10 medical office buildings are among “the leaders in their respective markets,” Klartich said, noting that although they make up only about 6% of CHS’ hospitals, they generate approximately 10% of the company’s EBITDAR.

“So, we feel they’re very strong; they’re very active campuses,” Klaritch said. “And in the long run, they’re going to be very good assets for us.”

HCP’s fourth-quarter 2016 revenue of $539.95 million beat analysts’ expectations by $13.08 million, and its fourth-quarter FFO of 59 cents beat analysts’ expectations by 2 cents.

Planned developments and dispositions

HCP’s medical office portfolio held an occupancy of 92% in the fourth quarter of 2016, Hutchens noted.

In 2017, the company is aiming to improve the quality of its portfolio by strategically disposing of non-core assets. Off-campus medical office buildings, or those in tertiary markets, are on HCP’s “hit list” for disposition or recycling, Hutchens said.

HCP currently has four on-campus, ground-up medical office building development projects in the works, which are 64% leased.

Written by Mary Kate Nelson