HCP a Defensive Play

El Camino Hospital recently announced that it would reopen the Los Gatos hospital facility, acquired from HCP Inc. (HCP - Analyst Report), on July 12. El Camino Hospital is a leading non-profit hospital in California, specializing in cancer care, heart & vascular, neuroscience, genomic medicine, orthopedic and spine and women’s health. HCP, a self-administered real estate investment trust (REIT), sold the Los Gatos hospital in California for $45 million in April 2009, realizing a gain of $31 million.

HCP does not run the healthcare business at its facilities. Instead, it has established business relationships with a number of experienced healthcare management companies or operators who lease these properties on a long-term basis — generally 10 to 15 years. The Los Gatos hospital was earlier operated by Tenet Healthcare Corp. (THC - Analyst Report), a leading operator of acute care hospitals and related healthcare services.

With the acquisition, El Camino Hospital has also gained access to 6,600 medical equipments that were used in the facility. The hospital was closed since April 11. During this period, El Camino Hospital conducted a series of safety checks and system tests in the hospital to guarantee state-of-the-art infrastructure and service facilities to the patients. It also hired eminent physicians and key personnel to bolster its team in the hospital. Satisfied with all the measures, El Camino Hospital will begin operating the Los Gatos hospital from mid-July, which is more than six weeks ahead of original schedule.

Healthcare REITs should hold up better in a recession, as consumers are constrained to spend on necessary healthcare while cutting out other non-essential services. HCP is the largest medical REIT in the US and has a broad array of business lines with exposure to all types of facilities. We think HCP is a good defensive stock in what could be a volatile year for REITs, and maintain our Buy rating.

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