HCP to Offer Common Shares - Analyst Blog

HCP Inc. (HCP), the largest medical real estate investment trust (REIT) in the U.S., has recently announced its offer of 40 million common shares at $32.00 per share. The company had earlier announced its offer of 31 million shares, but was forced to increase the secondary offering due to strong investor demand. The company will also grant the underwriters an option to purchase an additional 6.0 million shares to cover any over-allotments.

HCP anticipates raising approximately $1.28 billion of proceeds from the offer. The company will utilize the proceeds along with available cash and other debt offerings to fund the $6.1 billion acquisition of HCR ManorCare Inc.

Citigroup Global Markets Inc., the brokerage and securities arm of Citigroup Inc. (C); BofA Merrill Lynch, the investment banking and wealth management division of Bank of America Corporation (BAC); J.P. Morgan Securities LLC, the investment banking division of JPMorgan Chase & Co. (JPM); UBS Investment Bank, the investment banking division of UBS AG (UBS); and Wells Fargo Securities, the investment banking division of Wells Fargo & Company (WFC) are acting as joint book-running managers for the offering.

HCP is acquiring ownership interests in 338 post-acute, skilled nursing and assisted living facilities, located in some of the premium markets of the country typified by high barriers to entry. HCR ManorCare will continue to operate these health care facilities in accordance with the long-term triple-net master lease agreement, under which the lessee pays rent as well as taxes, insurance and maintenance expenses of the property.

The triple-net lease will generate a rent of $472.5 million in the first year and will increase by 3.5% every year for the first five years and by 3% for the remaining portion of the lease term.

Consequently, the acquisition enables HCP to secure a long-term growing income stream that would be accretive to earnings. On the other hand, the deal has strengthened HCR ManorCare's operations by virtue of a strategic alliance with one of the established players in the market. The transaction, therefore, is a win-win situation for both the participating companies.

HCP has one of the most diversified portfolios in the health care sector with exposure to all types of facilities. The product diversity of HCP allows it to capitalize on opportunities in different markets based on individual market dynamics, and provides a hard-to-replicate competitive advantage over its peers.

We maintain our ‘Neutral' recommendation on HCP, which presently has a Zacks #3 Rank that translates into a short-term 'Hold' recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.

 
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