HCP, Inc. (NYSE:HCP)’s 30-year dividend growth streak has long made it the darling of high-yield dividend growth investors.
HCP is also the only real estate investment trust (REIT) in the S&P Dividend Aristocrats Index. Investors can view analysis on all of the dividend aristocrats here.
Source: Simply Safe Dividends
However, as covered originally back in March (you can read the original investment thesis here), the company has hit some major rough patches in the last few years.
Now management has announced that it will spin off its troubled ManorCare skilled nursing facilities, or SNFs, into a separate REIT, which will greatly change the nature of HCP’s business model going forward.
Find out why management is making this game-changing decision, what it means for the company’s future growth prospects, and most importantly what it means for HCP’s legendary dividend growth streak.
The spinoff will cause HCP to reduce its dividend, but that’s not the entire story. Let’s start with a look at why HCP has decided to spin off some of its operations.
HCP’s Trouble with ManorCare
Back in 2011 HCP acquired 338 of ManorCare’s properties as well as a 9.4% equity stake in the company for $6.1 billion. Unfortunately, while this resulted in absolute growth in revenue and funds available for distribution, or FAD (what pays the dividend), it has created major headaches for HCP since then.
In 2015, the Justice Department launched an investigation of ManorCare over accusations of fraudulent Medicare, and Tricare (the private military medical insurer) reimbursement claims (1). In addition, ongoing changes in Medicare reimbursement from fee for service to managed care plans resulted in shorter stays at its facilities and a sharp decline in cash flow.
In fact, in late 2015 ManorCare’s occupancy dropped 1.75% to 82.6%, and its tenants’ fixed-fee coverage ratio or FFCR, a measure of cash flows versus liabilities, declined to 0.97 (2) for the last half of the year. So far in 2016 ManorCare’s customer’s FFCR has risen to 1.07, a nice improvement; but still dangerously close to the limits of sustainability.