It’s likely to be another tough year for real estate investment trusts, but two locally based health care industry landlords could be undervalued diamonds in the rough.
Long Beach-based HCP Inc. and Pasadena-based Alexandria Real Estate Equities Inc. this month reported solid fiscal years in 2007 with net income rising about 40 percent. For the coming year, both are expecting roughly 7 percent growth in funds from operations, a key industry metric for evaluating REIT cash flow.
Citi Investment Research’s Michael Bilerman is among several analysts who expect both companies to perform well this year as the U.S. economy flirts with recession. Health care properties tend to be less exposed to economic cycles than other types of real estate.
Even so, the share prices of both companies have fallen over the last 12 months by double-digit percentages, dragged down in part by fears about the entire REIT sector and the overall economy. HCP shares closed at $29.81 on Feb. 20, with Alexandria trading at a significantly higher $95.34.
Now considered the nation’s largest health care REIT after a string of acquisitions over the last two years, HCP has overhauled its portfolio to become a more diversified owner of hospitals, medical office buildings, senior housing and skilled nursing facilities. It has sold off most of its portfolio of nursing homes, whose tenants are vulnerable to shifting government reimbursement rates.
“With HCP you get a blend, with protection on the downside because of the stable long-term leases they have,” said Jerry Doctrow, an analyst with Stifel Nicolaus & Co. “You also get some exposure to growth, as well as potential risk, with their life science and medical office stuff.”
Some of that risk became apparent in a San Francisco-area biotech campus HCP is developing. Tenants there will include Thousand Oaks-based Amgen Inc., which preleased space prior to a downturn in business last year.
HCP Chief Executive James Flaherty said during the company’s fourth quarter conference call that he expects Amgen will honor the long-term lease. And given the strong demand for lab space in Northern California, the company should easily be able to sublease any excess space, he added.
Alexandria, which leases office and laboratory space to biotech and other life science companies, reported a total positive return topping 4 percent for 2007 even as the overall REIT sector was down 20 percent.
Considered the largest public life science REIT, Alexandria has consistently outperformed traditional mixed-office REITS. It has pioneered a niche with a high barrier to entry: lab space for biotech and drug-research companies. It plans to export that business model overseas to markets ranging from Scotland to China. But any overseas expansion carries risk due to the ongoing current global credit crunch.
“Further international projects will likely require (joint venture) for equity capital,” Bilerman said in a note to investors.
