DGI Adventure 07-03-16 Sold Cash Secured Put +Investment Thesis – HCP, Inc. (HCP) – $32.50 strike – July 15 Expiration

This trade was actually executed on Wednesday 06/22/16. I didn’t get a chance to write about it until today.

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article.

Dividend Cycle

HCP will go ex-dividend in early August. The dividend should pay $0.575/share. While HCP is the only REIT on the dividend champions list (31 years of increases), they’re about to spin off their HCR Manor Care Portfolio. There is much debate as to whether this going to put the streak in jeopardy or not. Regardless, future payouts will likely be split up between the HCP shares and the SpinCo shares, so who knows what the payments will look like at the end of this year or next. This trade will expire before the ex-dividend.

Investment

The QC (Quantitative Case)

My crisis of faith for REITs continues. I just don’t understand their financials. I realize that conventional corporation financials don’t make a lot of sense because of the capital structure, and amortization of the properties. This mostly about trying to average down on my cost basis and move the yield into a tax advantaged account.

SPL (Strike Price Logic)

We currently hold HCP in three different accounts. One of them is the taxable account, we also hold shares in both of our ROTHS. We own a total of ~80 shares at a cost basis around $40.80/share. I would definitely like to get rid of the shares in the taxable account (~27 shares). If assigned this would drastically lower my average cost basis. After waiting the requisite amount of time to avoid wash rule penalties, I could sell the taxable shares and harvest a capital loss. Then I would hold a little over 150 shares, which is about all the HCP I would want thank you very much.

QWaF (Qualitative Warm and Fuzzy)

They’re a dividend champion. They’re focused on healthcare related properties. Demographic trends are very much in favor of healthcare REITs right now (aging baby boomers). They are a triple net lease REIT, which means they basically print money and are landlords without most of the responsibility of a landlord. Seems like it’s too good to be true doesn’t it?

CPR (Cold and Prickly Risks)

I am terrified of the REIT business model. I still don’t see how it’s any different from the MLP structure. HCP has a big ol’ albatross around its neck called HCR Manor Care. It’s their largest tenant, representing 25% of lease revenue, and they’re reeling right now. Mostly from lawsuit troubles, but they’re having general financial issues too, not least of which are probably the oppressive triple net leases they have with HCP.

Anyway, management has decided to ring fence all their HCR Manor Care properties into a spin off company. The business bullshit speak says that will “unlock value for both entities”, but I think it mostly just gets the monkey off HCP’s back. The dividend champion streak may be over, and I might get stuck with some crappy SpinCo shares that are going to shit tank, but I suspect the market has mostly priced all that in. It’s not like it’s a surprise. There’s nothing wrong with the other 75% of their tenants, and they still own all the properties which aren’t worth nothing…I’ll nibble a little bit more to lower my cost basis, but that’s about it.

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