In its concerted effort to unlock value proposition for its
), a leading real estate investment trust (REIT), has decided to
acquire a portfolio of 133 senior housing communities for $1.73
billion. The properties would be acquired from a joint venture
) and an affiliate company of
The Blackstone Group LP
The properties were initially acquired by the joint venture in
2010 and the operations were subsequently transitioned to
Emeritus. Over the years, the joint venture invested about $42
million in capital improvements in the portfolio, resulting in an
increase in occupancy from 80% to 88%.
Spread across a wide geographical contour spanning 29 states, the
acquired portfolio includes a well-diversified spectrum of
healthcare facilities totaling 10,350 units. By segment, the
properties comprised of a mix of 61% assisted living, 25%
independent living, 13% memory care and 1% skilled nursing
Emeritus, an existing operating partner of HCP, is one of the
largest and most experienced operators of assisted living
facilities across the U.S., providing a residential housing
alternative to senior citizens who need assistance for daily
living. The transaction enabled Emeritus to monetize its economic
and promoted interests in the joint venture, unlocking $140
million of proceeds.
In concurrence with the deal, Emeritus would enter into a new
triple-net master lease agreement and continue operating the
communities. The lease would reportedly generate a contractual
rent of $105.5 million in the first year, representing a 6.1%
lease yield. The healthcare operator further committed to invest
an additional $30 million to improve the real estate and
operating performance of the portfolio.
At the same time, Emeritus would acquire the remaining nine
properties from the joint venture for an aggregate sum of $52
million. HCP is set to provide a four-year debt financing for the
acquisition, the interest rate of which is based on the 6.1%
lease yield of the portfolio.
On the other hand, HCP expects to acquire the healthcare
facilities substantially unencumbered by prepaying a significant
chunk of the in-place secured debts. The transaction is intended
to be financed in sync with its long-term leverage target of 60%
equity and 40% debt. The company anticipates the deal to be
accretive to earnings on an immediate basis.
In accordance with the turn of events, HCP has updated its
guidance for full year 2012. The company has raised its adjusted
FFO (fund from operations) guidance from $2.73 to $2.79 to $2.74
to $2.80. The company also expects cash NOI (net operating
income) guidance in the same-property portfolio to be in the
range of 3.75%-4.75%.
HCP is a leading healthcare REIT in the U.S. with one of the
largest and most diversified portfolios in the healthcare sector
and exposure to all types of facilities. The product diversity of
the company 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.
Healthcare is also relatively immune to the economic problems
faced by office, retail and apartment companies. Consumers tend
to continue to spend on healthcare while cutting out on
discretionary purchases. The healthcare industry is the single
largest industry in the U.S., based on Gross Domestic Product
(GDP), and offers stability in a volatile market.
However, one of the biggest risks to healthcare focused REITs is
government reimbursement rates, which are proposed to be reduced
in the coming years. Deep cuts in Medicare have been proposed
over the next five years by reducing or freezing payments to
skilled nursing facilities, hospitals, and other healthcare
With a large portion of HCP revenues being determined by
government payout rates, forces beyond its direct control could
negatively affect revenue and operator coverage ratios.
We maintain our Neutral recommendation on HCP, which presently
has a Zacks #3 Rank that translates into a short-term Hold
Note: FFO, a widely used metric to gauge the performance of
REITs, is obtained after adding depreciation and amortization and
other non-cash expenses to net income.
BLACKSTONE GRP (BX): Free Stock Analysis
EMERITUS CORP (ESC): Free Stock Analysis
HCP INC (HCP): Free Stock Analysis Report
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