HCP Raises $650M In Equity in First Half of 2019

HCP had a “productive first half of 2019,” according to Tom Herzog, president and CEO of the healthcare REIT on its recent earnings call. The company has been focused on restructuring its portfolio to strengthen its balance sheet in an effort to take advantage of “favorable capital market conditions and accelerate our growth across all three of our core business segments of life science, senior housing and medical office,” said Herzog on the call.

During the second quarter, the healthcare REIT raised $650 million in equity and refinanced $1.3 billion in debt, leading to FFO as adjusted of $0.44 per share and blended same store cash NOI growth of 3.5% and the total SPP NOI growth by 50 basis points. Year-to-date, the firm has also capitalized on a favorable cost of capital to acquire $1.5 billion of high-quality real estate year-to-date, already surpassing our full year guidance, according to Scott Brinker, chief investment officer.

In terms of acquisitions, the firm is focused on increasing life science density in its target markets of San Francisco, San Diego and Boston. In the second quarter, HCP exceeded its own expectations of life science and medical office segments. In life science, it had cash NOI growing 6.1%, according to Pete Scott, chief financial officer. A favorable leasing environment producing strong client demand and mark-to-market opportunities drives this activity. Year-to-date we executed over 1 million square feet of leases, including 600,000 square feet in the second quarter and our lease renewals exhibited a positive 11% mark-to-market.

In the medical office segment, second quarter cash NOI grew 3.8% driven by contractual rent escalators, increased occupancy, strong retention rate of 80%. Additionally, our Medical City Dallas campus experienced another quarter of strong growth contributing approximately 80 basis points, much higher than anticipated ad rents.

Its acquisitions during the first half of the year include Hartwell Innovation Campus, a 280,000-square-foot life science campus in the Boston for $228 million, which is a 5.25% cash cap rate, putting straight-line rent and mark-to-market the GAAP cap rate is in the mid sixes. “We are quickly approaching critical mass in Boston as well with three distinct life science campuses with an aggregate 1 million square feet. Having a bigger chess board with multiple price points and suite sizes allows us to meet tenant demand for space as their businesses evolve,” said Brinker.

In June, the REIT acquired Sierra Point Towers for $245 million at a 6% stabilized cash cap rate. The property is 400,000 square feet, bringing the firm’s total foothold to 1 million square feet of class-A campus at the shore in South San Francisco. “At the center for life science on the West Coast and where we enjoy number one market share,” said Brinker.

In the second quarter, HCP also delivered Phase III of The Cove in South San Francisco, all 324,000 square feet is fully leased with a 10 year weighted average lease term, and 3.5% rent escalators. Phase III produces $24 million of stabilized NOI equates to a 9.5% return on cost and underscores the significant value created given the fair market cap rate would likely be in the mid fours.

Looking ahead, the firm expects a pipeline of $75 million to $100 million in medical office development this year in partnership with healthcare provider HCA. In general, it will maintain its current strategy. “We will maximize value from our current portfolio through focused capital allocations supported by an ever improving operational and organizational platform,” said Herzog.