HCP Inc. (NYSE:HCP), the largest medical real estate investment trust (REIT) in the U.S., has recently acquired the real estate assets of HCR ManorCare Inc., a leading privately owned provider of skilled nursing facilities, for $6.1 billion. Spanning across 30 states, the properties are primarily concentrated in Ohio, Pennsylvania, Florida, Illinois and Michigan.
The transaction is expected to be completed by the first quarter of 2011. With the deal, HCP 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.
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 ‘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 Zacks #3 Rank for Health Care REIT Inc. (NYSE:HCN), a competitor of HCP.