Long Beach REIT Paces Medical Office Market

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Developers, private investors and specialized contractors aren’t the only ones benefiting from the surge in medical office construction.

HCP Inc., a real estate investment trust based in Long Beach, has ridden the health care construction boom to become the largest health care REIT in the country, with 700 properties nationwide.

In addition to medical office buildings, HCP, which is little known outside its industry, owns medical office buildings as well as properties as varied as hospitals, nursing homes and life science research facilities. Medical office properties account for 20 percent of its portfolio.

The REIT, the 10th largest public company in L.A. County, has grown largely through a string of acquisitions and a strategy centered on diversification.

Most recently the company made a big move to increase its presence in life sciences, a broad category that includes clinical office space, lab space and even medical devices.

Yet the company, for all its success, is not interested in acclaim. The company has long shied away from the press. Chief Executive James Flaherty, reached by phone at his office, would not comment on the company or its recent success.

“We typically tend to take a pass with the media,” he said.

Founded in 1985, the company got its start at a time when REITs mostly steered clear of health care properties. At the time, hospitals and other medical facilities were considered too difficult to manage and finding tenants was a challenge.

But it turned out that HCP was at the head of a wave of health care REITs that started cropping up at the time, including Beverly Investment Properties Inc. and Meditrust Inc.

By 1995, the company ranked among the largest health care REITs, and owned or held a stake in 202 properties for a total investment of about $800 million. But the company was far from diversified: The vast majority of its properties were long-term care or assisted-living facilities.

But in the more than two decades since the company was founded, health care spending has surged in the United States, prompting HCP to broaden its investment strategy. In 1981, the country spent just under 13 percent of the gross domestic product on health care, by 2007 that reached 16.5 percent and by 2015 it is projected to reach almost 20 percent.

Fueling that increase, experts said, is a baby boomer population reaching retirement age. “That’s obviously one of the key points,” said Bridget Adams, an analyst at Argus Research.


Life sciences

But HCP has benefited from more than just that. Management has taken advantage of one of the industry’s key growth areas: life science.

In August 2007, HCP closed the $3 billion acquisition of Slough Estates USA, which consisted of the U.S. portfolio of U.K. REIT Segro PLC. HCP acquired 83 properties in San Francisco and San Diego, bolstering its nascent life science portfolio.

“The current management team has shown great acumen in moving in and out of these different businesses to take advantage of changing trends,” said Adam Feinstein, an analyst with Lehman Brothers, in a recent report.

The company now own all or part of more than 100 life science properties leased to companies including Thousand Oaks-based Amgen Inc. and San Francisco-based Genentech Inc. Those facilities constitute nearly one-quarter of HCP’s total investments up from just 2 percent in 2002. The company said it expects to develop as many as six new life science buildings in 2008.

Meanwhile, shares of the company have risen somewhat steadily, from under $7 two decades ago to more than $31 today. However, the stock has been volatile since early 2007, when it topped $41 a share. There is concern on Wall Street that at its current level the stock may not be a good buy.

Michael Bilerman, an analyst with Citi Global Wealth Management, said the acquisition of Slough Estates USA’s life sciences portfolio should help spur growth, but he recently lowered his 2008 earnings expectations. “HCP owns a high-quality portfolio of health care facilities, reducing our concerns, but upside seems capped from current levels.”

Still, because of the steady demand for health care, the company is more insulated than most in a down economy.

“Their revenues are essentially derived from services that are essential to humans health services still (sell), just like consumer staples,” Adams said. “Those things typically don’t wane in deteriorating economic conditions.”

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