HCP's Debt Offer to add facilities - Analyst Blog

HCP Inc. (HCP), the largest medical real estate investment trust (REIT) in the U.S., has recently announced a debt offer of senior unsecured notes worth $2.4 billion. Wells Fargo Securities LLC, part of Wells Fargo & Company (WFC); BofA Merrill Lynch, the investment banking and wealth management division of Bank of America Corporation (BAC); and UBS Investment Bank, the investment banking division of UBS AG (UBS) are the joint book-running managers for the offering.

HCP intends to utilize the proceeds to fund the acquisition of HCR ManorCare Inc., a leading privately-owned provider of skilled nursing facilities. Earlier in late 2010, HCP had acquired the real estate assets of HCR ManorCare for $6.1 billion. With the deal, the company will gain 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.

Post acquisition, HCR ManorCare will continue to operate the 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% per year after each of the first five years and by 3% for the remaining portion of the fixed term.

Consequently, the acquisition enables HCP to secure a long-term growing income that would be accretive to earnings. On the other hand, the deal has strengthened HCR ManorCare's operations by forging 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 does not run the health care business at its facilities. Rather, 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 for 10 to 15 years. This insulates the company from short-term market swings, and provides a steady source of income.

Furthermore, 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 ‘Outperform' recommendation on HCP, which presently has a Zacks #1 Rank that translates into a short-term 'Strong Buy' recommendation and indicates that the stock is expected to perform well above the overall U.S. equity market for the next 1–3 months.

 
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