HCP Inc. HCP – a healthcare real estate investment trust (“REIT”) – reported third-quarter 2015 adjusted funds from operations (“FFO”) per share of 79 cents, a penny ahead of the Zacks Consensus Estimate and 4 cents up year over year. Results benefited from solid growth in top line.
Total revenue came in at around $658.0 million, beating the Zacks Consensus Estimate of $582 million by a wide margin. Reported revenues also compared favorably with the year-ago number of $596.6 million.
However, same-property portfolio cash net operating income (“NOI”) dipped 0.8% year over year.
Behind the Headlines
During the reported quarter, HCP enhanced its senior housing joint-venture partnerships with Brookdale Senior Living and MBK Senior Living with new investments worth $26 million. This brought the tally of its year-to-date total investments to $1.9 billion.
The company executed 667,000 square feet of leasing in its life science and medical office portfolios during the quarter. This comprised 211,000 square feet of new leases and 456,000 square feet of renewals. Notably, HCP pre-leased 38,000 square feet in the first phase of The Cove life science development. The first phase comprises two buildings aggregating 253,000 square feet and is estimated to be complete in the third quarter of 2016.
HCP’s life science occupancy was 98.1% as of Sep 30, 2015, denoting the fifth consecutive quarterly all-time high for this segment. Moreover, its medical office occupancy was 91.5%, marking the eighth consecutive quarter with occupancy over 90%.
During the third quarter and through Nov 2, 2015, HCP raised $438 million from its capital recycling and financing activities. The company utilized large part of the proceeds to pay down its revolving line of credit. As a result, the company achieved a 170 basis point sequential improvement in financial leverage to 43.7%.
HCP exited the third quarter of 2015 with cash and cash equivalents of $120.5 million, down from $183.8 million at 2014-end.
Outlook
For 2015, HCP updated its FFO as adjusted per share guidance to $3.12–$3.18. The Zacks Consensus Estimate is currently pegged at $3.15. The company continues to expect 2015 same-property portfolio cash NOI to increase up to 1.0%. Excluding HCR ManorCare, the company projects 2015 same-property portfolio cash NOI to increase 3.25%–4.25%.
Dividend Update
On Oct 29, 2015, HCP announced a quarterly cash dividend of 56.5 cents on its common stock. The company will pay the dividend on Nov 24 to shareholders of record as on Nov 9.
Conclusion
We believe that HCP stands to benefit from its diversified portfolio, increasing healthcare spending and an aging population in the long run. Strategic investments, tie-ups and opportunistic acquisitions would drive decent cash flow. Yet, cut-throat competition and an anticipated increase in interest rate continue to pose challenges before the company.
HCP currently has a Zacks Rank #3 (Hold). Investors interested in the REIT industry may consider stocks like Highwoods Properties Inc. HIW, SL Green Realty Corp. SLG and Sovran Self Storage Inc. SSS. All these stocks carry a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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