HCP Sells Senior Living Properties – Analyst Blog

HCP Inc. (HCP), the largest medical real estate investment trust (REIT) in the U.S., has recently entered into an agreement with Assisted Living Concepts Inc. (ALC), which operates senior living residences, to sell nine senior living properties for $27.5 million. The transaction is expected to be completed by October 2010.

 

About seven of the senior living properties are located in Texas, while the remaining two are located in New Jersey. The assets are currently leased and operated by Assisted Living Concepts under leases expiring between 2010 and 2012. Total occupancy of the properties comprising 365 units is 60%.

 

With the acquisition, Assisted Living Concepts expects pre-tax cash flow to increase by approximately $1 million, primarily due to the differential between the current lease payments and expected future interest expense. On a per share basis, cash flow after tax is expected to improve by approximately 5 cents.

 

The asset sale has increased the liquidity of HCP. The company does not run the health care business at its facilities. Rather, it has established business relationships with a number of experienced health care management companies or operators who lease these properties on a long-term basis – generally 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 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.