HCP Inc. HCP has lowered its outlook for 2015 on account of the Master Lease amendment with HCR ManorCare and a non-cash impairment charge. The company now expects its full-year adjusted funds from operations (“FFO”) within $3.06–$3.12 per share, down from $3.15–$3.21 estimated earlier.
Specifically, the Master Lease amendment with HCR involves a portfolio of 333 post-acute, skilled nursing and assisted living facilities owned by HCP. Beginning Apr 1, 2015, HCP has allowed a net reduction of $68 million in annual rent for HCR, leading to HCR paying $473 million as initial lease-year rent and a 3% annual increase during the initial term.
In exchange, HCP would get a fee ownership in 9 new post-acute facilities valued at $275 million. With a median age of 4 years, these properties are currently owned and operated by HCR. The transfer of ownership to HCP is slated to be accomplished within the next 12 months, and starting Apr 1, HCP would receive $19 million in rent annually from these facilities.
Moreover, HCP would enjoy a second lease, receivable with an initial amount of $250 million, payable by HCR ManorCare, as well as an extension of the initial lease term by 5 years to an average of 16 years.
In addition, HCP disclosed that the sale of 50 non-strategic facilities is expected to be accomplished within late 2015 to early 2016, leading to generation of net proceeds of $250–$350 million. Finally, HCP would incur a non-cash impairment charge of around $481 million or $1.03 per share associated with the direct financing lease investments with HCR ManorCare.
Despite the 2015 outlook slash, we believe these measures would be a strategic fit for HCP in the long term. This is because HCP’s future growth in rental stream would be ensured, as the lease amendment and asset sale deals are projected to help HCR’s corporate fixed charge coverage increase to 1.28x–1.30x (projected), and facility-level rent coverage improve to 0.98x–1.00x.
Further, HCP’s risk would be lowered as tenant concentration in HCR ManorCare is estimated to get reduced to 25% from 29% of its annualized portfolio income (pro forma, full-year run rate basis). Growth can also be leveraged as HCP would take part in the expected increase in cash flows and value of HCR ManorCare OpCo over time, through its 9.4% equity stake.
HCP currently carries a Zacks Rank #3 (Hold). Investors interested in the REIT may consider stocks like Medical Properties Trust Inc. MPW, Omega Healthcare Investors Inc. OHI and Ventas, Inc. VTR. All these stocks hold a Zacks Rank #2 (Buy).
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