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Morningstar | HCP's Slimmed-Down Portfolio Is Better Positioned for Growth

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.In our view, HCP will benefit from these industry tailwinds as a result of its portfolio of well-located assets that draw high-quality healthcare tenants. HCP has largely finished simplifying its portfolio to focus on senior housing, medical office, and life science assets. The company has completed or is under contract to dispose of or transition assets away from troubled senior housing partner Brookdale, reducing HCP’s net operating income concentration in Brookdale to approximately 16% from approximately 34% at the end of 2016. Even after the Brookdale dispositions, HCP will retain a significant senior housing portfolio. Increased national senior housing supply has dragged on the company as growth has slowed, though we remain optimistic about the sector’s prospects, given that construction starts are decelerating and the demographic boon is only a few years away.HCP’s life science and medical office portfolios will feature more prominently in the future; these are two segments where the company has high-quality assets in top markets that attract credit-grade tenants. Despite the possibility of further changes to the ACA, we think any changes will still result in a coordinated value- and outcome-based system that will provide HCP’s current portfolio with strong tailwinds.