HCP Inc. (HCP), the largest medical real estate investment trust (REIT) in the U.S., has recently announced an equity offer of 30 million common shares at $36.90 each. The company had earlier announced its offer of 24 million shares, but was forced to increase the secondary offering due to strong investor demand. HCP will also grant the underwriters an option to purchase an additional 4.5 million shares to cover any over-allotments.
The company expects to raise about $1.1 billion in proceeds from the offering, which would be primarily utilized to fund a portion of the $6.1 billion acquisition of HCR ManorCare Inc. HCP also plans to spend $852 million from the proceeds to fund the entire stock portion of the acquisition in cash, in lieu of issuing 25.7 million shares of its common shares to HCR ManorCare. BofA Merrill Lynch, the investment banking and wealth management division of Bank of America Corporation (BAC) is acting as the sole book-running manager for the offering.
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.
HCP does not run the healthcare 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 10 to 15 years. This insulates the company from short-term market swings, and provides a steady revenue stream.
In addition, healthcare is relatively immune to the economic problems faced by office, retail and apartment companies. Consumers will continue to spend on healthcare while cutting out discretionary purchases. The healthcare industry is the single largest industry in the U.S., based on Gross Domestic Product (GDP), and offers stability to the company amidst the volatility in the market.
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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