HCP (HCP)

Headquartered in Long Beach, CA, Health Care Property Investors, Inc. (HCP) is a self-administered real estate investment trust (REIT), which invests in and leases directly or through joint venture healthcare facilities in over 40 states. In September 2007, the company changed its name from Health Care Property Investors, Inc. to HCP, Inc. As of June 30, 2008 the company's portfolio included 706 properties consisting of 25 hospitals, 51 skilled nursing facilities, 267 senior housing facilities, 256 medical office buildings, and 107 life science facilities. 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. HCP's top five tenants by percent of revenue contribution (2Q08) are: Sunrise Senior Living (15%), HCR ManorCare (9%), HCA (7%), Brookdale (6%), and Tenet Healthcare (3%).

The capital markets are still in disarray and 2009 will be a tough year for many commercial real estate owners. Asset values continue to drop among most commercial property types as financing is becoming more difficult. Health care is a defensive sector in uncertain economic times as it is somewhat immune from economic problems that office, retail and apartment companies face. HCP is the largest medical REIT in the US and has a broad array of business lines with exposure to all types of facilities. HCP reported relatively good 2Q08 results. In 2Q08, HCP reported FFO of $0.51 per share versus $0.58 in the year-ago quarter. 2Q08 FFO included the impact of impairments ($0.04 per share), a write down in the carrying value of securities ($0.01 per share), and an ineffectiveness charge ($0.01 per share) relating to the settlement of forward swaps. FFO in 2Q08 also included merger-related charges of $1.1 million or less than $0.01 per share. Excluding these items, FFO for the current quarter would have been $0.57 per share, $0.01 above consensus and $0.02 shy of our estimates. We are projecting FFO of $2.30 per share in 2008, or approximately 8% growth. HCP increased its full year 2008 FFO guidance to $2.27 - $2.35 per share.

Overall same-store (SS) NOI in the company's portfolio increased 1.0% in 2Q08 vs. 2Q07. The company reported SS NOI increases in three segments (2Q08 vs. 2Q07) Senior Housing (2.6%), Skilled Nursing (2.7%), Life Science (3.9%). MOBs (medical office buildings) and Hospitals reported a 1.2% and 1.4% y/y SS NOI decline. Adjusted (including straight line rents) SS NOI increased 1.9% across the portfolio in the quarter vs. the year-earlier period. By property type, adjusted SS NOI increased in MOB (1.5%), Senior Housing (2.2%), Skilled Nursing (3.1%), and Life Science (11.0%). Adjusted SS NOI declined in the Hospital segment (0.6%). SS NOI increases were primarily driven by escalation clauses in existing contracts.

HCP closed the acquisition of Slough Estates (SEUSA) in mid 2007 for about $3 billion. The integration of the Slough portfolio was completed in late September this year. With the acquisition of SEUSA, HCP acquired a life science and pharma portfolio concentrated in San Francisco and San Diego, where it has 83 existing properties with about 5.2 million square feet of space. Additionally, HCP also acquired a development pipeline of 3.8 million square feet. We like the quality and location of the assets purchased, as they are situated in very high barrier areas of the country with good demographic trends which should lead to profitable health care development. Current rents in the life science portfolio are over 20% below market rents, which will enable the company to push rates as leases roll.

HCP has been busy selling assets and raising capital to get debt levels down to pre-acquisition levels. During 2Q08, HCP sold 40 properties for $496 million. YTD, HCP has sold approximately $526 million of assets. The company expects to sell a total of $750 million of properties in 2008 with estimated GAAP gains of about $285 million. Also during 2Q08, HCP raised $560 million of equity and $254 million of agency secured debt on 21 senior housing properties. In early October, HCP placed another $319 million of secured debt on 16 properties. Subsequent to quarter end, HCP closed on another 15 million shares, which raised about $500 million, which will be used to pay down debt. In total, the company has raised over $2.0 billion this year, which will be used for the primary purpose of paying down the line of credit and the bridge loan used to acquire SEUSA. At quarter end, the outstanding balance on the bridge loan was $1.15 billion and the company's leverage ratio was down from 57% at year end 2007 to about 51% today. 2008 debt expirations are manageable at $374 million. Floating rate debt now stands at about 24% of total, down from 36% at year end 2007. Including hedges from the Manor Care investment, floating rate debt represents about 7% of total debt

At the end of 2Q08, HCP reached an agreement to restructure its hospital portfolio with Tenet Healthcare. This restructuring takes care of most of the company's 2009 expirations. According to the terms of the agreement, HCP will sell a hospital in California to Tenant, terminate two other hospital leases in California, and extend three other leases. The company will realize large gains on the hospital sale and has already leased one of the vacated hospitals to another operator. Upon closing of this agreement, HCP expects to realize $23-$28 million of additional FFO, which is included in full year 2008 guidance.

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