HCP, Inc.: ManorCare Spinoff Is FANTASTIC News for HCP Stock

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HCP, Inc. (HCP) earnings matched Wall Street estimates in the most recent quarter, but that’s not what had HCP stock soaring on Monday.

hcp stock manorcare spinoffNo, investors were thrilled with news that HCP would spin off its troubled HCR ManorCare portfolio into a separate real estate investment trust.

Bottom line: HCP stock hasn’t looked this attractive in quite some time.

HCP — the only REIT in the S&P 500 Dividend Aristocrats index — has long been a rock-solid and generous income play, but its ManorCare assets of skilled-nursing and assisted-living facilities have been dragging returns into the mud for several years now.

Indeed, the portfolio is Exhibit A in the bears’ case against HCP stock. Declining admissions, lower rent coverage and a lawsuit by the U.S. Justice Department have made ManorCare an albatross for HCP.

As a result, shares in HCP have been huge market laggards for years. HCP stock has lost 8% (even including dividends) over the last 24 months vs. a 14% total return for the S&P 500. Over the past five years, the broader market has returned 70% while HCP stock has delivered just 20%.

These are not the sort of returns that investors sign up for when they buy a stock with one of the heftiest dividend yields in the S&P 500.

Even the current boffo yield of 6.4% doesn’t make up for that kind of price performance.

However …

HCP Stock Can Become a Market Beater Once Again

Maybe now that HCP is shedding its biggest drag on results, the stock can get back to being known primarily as dividend machine and not just another troubled REIT. After all, HCP has paid uninterrupted dividends since 1985, making it one of InvestorPlace’s Dependable Dividend Stocks.

The new REIT will have a real estate portfolio composed of more than 320 properties, led by facilities operated by HCRMC, with expected in-place annual rent of approximately $485 million.

Once the spinoff is completed (expected to be in the second half of the year), HCP will have more than 860 properties generating income of about $1.4 billion a year.

It also gets a new lease on life. As CEO Lauralee Martin said in a statement:

“We believe this transaction gives HCP the ability to re-confirm itself as a blue-chip, innovative and relationship-oriented healthcare REIT. Post spin, HCP will own a stable, private-pay portfolio that has a track record of delivering consistent, attractive returns. HCP will be able to sharpen its focus on high-growth healthcare sectors and, with a cost of capital benefiting from the stability and growth profile of these strong sectors, we will be positioned to achieve accretive new investment growth.”

Adding to the optimism was a decent earnings report. HCP posted funds from operations of $321.8 million, or 69 cents per share, in the most recent quarter. That matched analysts’ average forecast, according to a survey by Thomson Reuters. Revenue came to $640.8 million vs. a Street forecast for $631 million.

Now that HCP has moved to address what has been by far its biggest problem, investor sentiment on the name should improve.

Take the powerful demographic tailwind of aging baby boomers, and HCP stock has its best shot of long-term outperformance in years.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/hcp-stock-manorcare-spinoff/.

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