HCP Completes Share Offer - Analyst Blog

HCP Inc. (HCP), the largest medical real estate investment trust (REIT) in the U.S., has recently completed its secondary offering of 46 million common shares at $32.00 per share, including 6.0 million shares sold to the underwriters to cover the over-allotment options. The company had earlier announced a offer of 31 million shares, but was forced to increase the offer due to strong investor demand.

HCP raised approximately $1.47 billion of proceeds from the offer. The company will utilize the proceeds along with available cash and other debt offering to fund the $6.1 billion acquisition of HCR ManorCare Inc. HCP acquired ownership interests in 338 post-acute, skilled nursing and assisted living facilities, which were located in some of the premium markets of the country typified by high barriers to entry.

HCR ManorCare will continue to operate these healthcare 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. For full year 2010, HCP revised its FFO (funds from operations) guidance before non-recurring items from the range of $2.18 to $2.24 per share to $2.17 to $2.23 to reflect the effect of the acquisition. 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 deal 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. We also have a ‘Neutral' recommendation and a Zacks #3 Rank for Health Care REIT Inc. (HCN), a competitor of HCP.

 
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