HCP Inc.
(HCP), the largest medical real estate investment trust (REIT) in the U.S., recently completed an equity offering of 17.8 million shares at $24.75 each. The company will use the proceeds for repaying its outstanding debt under the revolving credit facility and general corporate purposes. The decrease in overall debt will reduce HCP’s financial leverage and strengthen its balance sheet.

During the second quarter, HCP had completed the sale of 20.7 million shares at $21.25 each, raising net proceeds of $422 million. This helped the company in improving its financial leverage to 44% in the quarter, from 48% at the end of 2008. The adjusted fixed charge coverage ratio also improved to 2.6X from 2.3X in the prior-year quarter.

HCP has the most diversified portfolio in the healthcare sector with exposure to all types of facilities. Its product diversity helps the company to capitalize on opportunities based on individual market dynamics and provides a hard-to-replicate competitive advantage.

Moreover, healthcare is relatively immune to the economic problems faced by office, retail and apartment companies. Consumers will continue to spend on healthcare even while cutting out discretionary purchases. Healthcare industry is the single largest industry in the US, based on Gross Domestic Product (GDP), and offers stability to the company amidst the volatility in the market.

However, HCP operates in a very competitive market, which offers unique challenges to maintain its profitability. We reiterate our Neutral recommendation of the company.

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