In a report published in early June, we concluded that within healthcare REITs, HCP Inc. (HCP) and Health Care REIT (HCN) are positioned to benefit from their diversified portfolios of healthcare properties. The diversity in HCN's healthcare properties enables it to earn a relatively stable cash flow stream in terms of the rentals they receive. We believe the recent deal with Sunrise Senior Living Inc. (SRZ) has the potential to increase the market share in a country where the population is growing old. Therefore, we recommend our readers to long the stock.
HCN happens to be the third largest health-care REIT in the U.S. The company is all set to purchase Sunrise Senior Living Inc. , which will expand its assisted living community operations. This will cost HCN $845 million.
Benefits of Transaction
This new acquisition will significantly benefit HCN, as a large proportion of the U.S. population is growing old and will require assisted living. People above the age of 65 years in the U.S. will reach 79% of the entire U.S. population by 2030. This reflects a tremendous opportunity going forward, which the management at HCN is ready to avail.
Under the proposed acquisition, HCN will take control of another 20 wholly-owned senior housing communities in not only the U.S., but also Canada. Also, the company will take over joint ventures of 105 communities, of which 27 are in the U.K. Once the transaction is completed, HCN will own a total of 58,000 senior housing units in a vast geographical region. The deal, which is scheduled to be completed by the first half of 2013, has not been finalized by the shareholders of Sunrise. Besides increasing the asset quality of the company, the deal will result in an increase in the company's exposure to private-pay assets (from 74% to 77%).
Negatives of Transaction
On the negative side, the company is expected to tap equity markets to fund a portion of the deal through equity financing. This will exert a temporary downward pressure on the share price. Fitch, a premier U.S. credit rating agency, announced that the deal will have no impact on the rating of the company. After the end of the second quarter of the current year, the company's leverage ratio was 5.9 times. Fitch expects the leverage ratio to reach 6 times after the company raises equity for the proposed transaction.
Recent Performance Review
Previously, the company had demonstrated tremendous growth. Over the past four quarters, the company experienced double digit YoY growth. The bottom line of the company has also shown an increasing trend over the past three quarters. Going forward, we believe the company will generate adjusted funds from operations (AFFO) of $3.25 per share at the end of the current year. This will be a YoY growth of 23.4%, against a 13% growth for the industry.
The company offers a handsome dividend yield of 5%, which is well backed by an FFO yield of 6.9%.
Disclaimer: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.