This is just an addition to Richard Woon’s stock pick of HCP.  I did a little research on the little over leveraged REIT.  I should have done the research before but this schedule of mine is not allowing much time for anything.  I’ve been busy trying finalize some trading strategies and hopefully leading to some really innovative trading applications but it’s a long ways off at this time unless I take time off school.  Prologis which was Richard’s first pick was pretty much on the dot.  I added to the analysis on my blog earlier.  I unfortunately didn’t catch all the downside on PLD but did catch some of it.  Profit is profit.  I would like to disclosure right away that I owe puts on HCP before I present my analysis.

“Health Care Property Investors, Inc. operates as a real estate investment trust in the United States. The company, through its subsidiaries and joint ventures, invests in health care-related properties and provides mortgage financing on health care facilities. It acquires health care facilities and leases them to health care providers.”

The important thing that should be noted is that it “provides mortgage financing on health care facilities” as well.  But the analysis of their leverage and use of borrowing to fund their dividends is another story.  Let’s just look at a fundamental problem that may hurt their revenue and thus profits.  When then may hurt credit ratings and then may suggest solvency.  Let’s just look at their customers: (this is from the HCP site):

So here is a summary of the chart:

• Sunrise Senior Living: 14%
• HCR Manorcare: 8%
• HCA: 6%
• Brookdale Senior Living: 6%
• Tenet Healthcare Corporation: 3%
• Total: 37%

So the major clients and tenets are listed for a total of over one third so they contribute tremedously to revenues and profits.  So let’s look at each customer or tenent starting with the biggest:

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Sunrise Senior Living: (SRZ) – 52-Week Change:-96.16%

“NEW YORK, Nov 10 (Reuters) – Sunrise Senior Living Inc (SRZ.N: Quote, Profile, Research, Stock Buzz) shares tumbled 39 percent on Monday after at least two analyst downgrades, citing financing concerns.

Shares of the operator of senior living facilities closed down 83 cents at $1.30 on the New York Stock Exchange on Monday afternoon. The shares have fallen some 96 percent this year.

On Friday, Sunrise posted a quarterly loss and warned that it expects to violate two financial agreements by the end of the fourth quarter. It said the company and its lenders intend to revise and restructure its credit line by Jan. 31, 2009.

Stifel Nicolaus analyst Jerry Doctrow, who cut his rating to “hold” from “buy,” said he continues “to see bankruptcy as a much less likely possibility than a recapitalization.”

CONCLUSION: BANKRUPTCY EMINENT

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Manor Healthcare: No longer public. Leveraged Buyout 2007.

“NEW YORK (CNNMoney.com) — Nursing home operator Manor Care Inc. said Monday it has agreed to be taken private by private equity firm Carlyle Group for $6.3 billion, including assumed debt.

Completion of the transaction is pending shareholder approval. Manor expects the deal to close in the fourth quarter of 2007. The deal will be financed through a combination of commercial mortgage-backed securities, other debt financing and cash provided by Carlyle.”

Leveraged buyouts are usually bad ideas especially when they are financed by “commercial mortage backed securities, other debt financing.”  We all know that very little cash was put into the deal so the business is probably struggling with its heavy debt.  If it was my guess if Manor Care is suffering, my guess is yes.

CONCLUSION: OVER LEVERAGED

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HCA: No Longer Public.  Leveraged Buyout 2006

“In the HCA deal, the three private-equity firms — Bain, Kohlberg Kravis and Merrill Lynch’s buyout unit — and the Frist family are investing only $5.5 billion in cash. The rest of the $31.6 billion price tag is being financed by debt, which the firms will hope to pay down, like a mortgage payment, using HCA’s income.”

So they have about $26 billion in debt that “the firms will hope to pay down, like a mortgage payment” which I highly doubt they will be paying off soon.  Since they are private, we really don’t know what the terms of the loans are but I’m sure they aren’t having fun paying off the debt. In 2006, revenues were 25.4B, operating income 1.8B, and net income of 1B.  I think they are paying at least 1B a year in financing in this deal assuming they are borrowing at 4% which I highly doubt so I think close to 6% which makes it 1.5B.  So that’s pretty darn close to the 1.8B in operating income from 2006.

CONCLUSION: OVER LEVERAGED

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Brookdale Senior Living: BKD – 52-Week Change:-81.89%

Brookdale shares plunge following 3Q results
Wednesday November 5, 12:54 pm ET

Brookdale shares decline a day after it posted wider-than-expected loss CHICAGO (AP) — Shares of Brookdale Senior Living Inc. plummeted Wednesday, a day after the nation’s largest provider of senior-care facilities reported a bigger-than-expected loss for the third quarter amid higher operating costs.

Shares fell $1.82, or 16.4 percent, to $9.29 in afternoon trading, more than wiping out the previous day’s double-digit increase when investors were hoping for stronger results. The stock has lost close to three-quarters of its value in the past year.

Avondale Partners analyst Derrick Dagnan said that “while sequential growth in occupancy is a welcome sign and pricing growth remained solid at 4.7 percent, margins and cash flow suffered from elevated expense levels for labor, food, and utility and energy costs.”

So let’s just say that Brookdale isn’t doing very well.  The price of the stock has actually fallen to $5.79 since the earnings announcement.  Let’s just say that there’s a reason why the stock is down here.

CONCLUSION: SOLVENCY ISSUES SOON

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Tenet Healthcare: THC – 52-Week Change³:-52.64% – Stock Price $2.06

Seriously do I even need to talk about Tenet Healthcare.  Well their over 4B in debt doesn’t help nor does the -640M in leveraged cash flow.

Tenet Healthcare falls on weak 3Q and outlook

Wednesday November 5, 6:44 pm Tenet Healthcare stock skids further as analysts reduce expectations for 2009 results NEW YORK (AP) — Shares of Tenet Healthcare Corp. dropped Wednesday, as the hospital operator’s weak third-quarter results and forecasts led Wall Street to predict further difficulties in 2009.

The stock fell 13 cents, or 5 percent, to close at $2.48, and set an all-time low of $2.25. On Tuesday, Tenet reported a disappointing third quarter, and said the struggling U.S. economy will continue to hurt its results for the rest of the year and into 2009.

Analysts reduced their estimates to reflect the company’s lower 2008 outlook and its warning that it may not be able to reach its revenue guidance next year.

Deutsche Bank analyst Darren Lehrich downgraded the stock to “Hold” from “Buy” on the news, saying the company was hurt by greater bad debt, business lost as a result of hurricanes, and a less-profitable mix of patients, with more Medicare Advantage, Medicaid and uninsured patients seeking care.

Let’s just say…Tenent Healthcare is not doing very well and look at that awesome stock price which made a new low since earning.

CONCLUSION: SOLVENCY ISSUES

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Let’s conclude the analysis.  All of the main tenants are over leveraged while three of them who are public have stock prices that suggest they will go to zero.  The other two are leveraged buyouts that have massive debt and will probably suffer with the declining economy.  Let’s just say it doesn’t look bright for HCP.  Moody’s, it might be a good idea to take a look at this.

Boy that was a long post.  Hope that helps.  So go short HCP.

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