HCP Inc. HCP is likely to benefit from a diversified high-quality health care real estate portfolio, rising healthcare spending and aging population. Further, the company has resorted to strategic divestitures and is also lowering its Brookdale-portfolio concentration. Recently, in sync with its efforts, the company announced the shift in its operator for 24 senior-living communities owned by them, from Brookdale to Atria Senior Living.
However, the softness in the seniors housing fundamentals amid new supply is anticipated to thwart the company’s pricing power. Also, the hike in interest rate and stiff competition remain concerns for HCP.
Notably, in February, HCP reported fourth-quarter 2017 funds from operations (FFO) as adjusted of 48 cents per share, beating the Zacks Consensus Estimate of 47 cents. Results reflected a 1.2% increase in the three-month same-property portfolio cash net operating income.
HCP has exposure to all types of facilities in the healthcare sector and has a well-balanced and diversified portfolio. The diverse product mix of the company allows it to explore available opportunities in various areas, based on individual market dynamics.
Further, the company is focused on making opportunistic acquisitions and strategic dispositions to enhance its overall portfolio mix. During the fourth quarter, HCP announced $424 million of acquisitions. Notably, HCP completed the previously-announced $228-million acquisition of the Hayden Research Campus in the Boston life-science market. It also acquired 11 off-campus medical-office buildings for $151 million. Also, the company started Phase I of Sierra Point, marking its next key life-science development in the South San Francisco market.
In addition, recently HCP shifted the operator of 24 senior living communities owned by them, from Brookdale Senior Living to Atria Senior Living. The transition is scheduled to start from this month and is likely to be accomplished by September 2018. The company has been continually trying to reduce its exposure to Brookdale as it has been facing operational and financial challenges for the past few years.
Once it is completed, the dealings will benefit HCP in a number of ways. It will considerably decrease Brookdale’s concentration, increase lease coverage of their remaining triple-net assets leased to Brookdale, improve the diversification of tenants in the portfolio and enhance credit profile and balance sheet.
Nevertheless, softness in the senior housing fundamentals is likely to continue in the upcoming quarters amid rising supply in the market. This is anticipated to adversely affect the company’s pricing power and occupancy level. In addition, the cut-throat competitive market makes it more challenging for HCP to increase its revenues as well as identify and successfully capitalize on acquisition opportunities that meet its objectives.
Additionally, the company is currently focusing on lowering its Brookdale-portfolio concentration. The move involves a number of strategic efforts including selling of considerable part of its portfolio and using the proceeds in debt repayment. Although such efforts are a strategic fit for the long term, the dilutive impact on earnings in the near term from the sale of assets is unavoidable.
Amid these, shares of this Zacks Rank #3 (Hold) company underperformed its industry over the past three months, plunging 14.3% as against the industry’s loss of 10.8%.
Stocks Worth a Look
A few better-ranked stocks from the same industry include Arbor Realty Trust ABR, Extra Space Storage Inc. EXR and Sotherly Hotels Inc. SOHO. All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arbor Realty Trust’s Zacks Consensus Estimate for 2018 FFO per share has been revised 2.3% upward to 90 cents over the past month. Its share price has risen 7.9% in six months’ time.
Extra Space Storage’s FFO per share estimates for the current year inched up 1.6% to $4.57 in a month’s time. Its shares have gained 6.7% over the past six months.
Sotherly Hotels’ FFO per share estimates for 2018 have been revised approximately 1.9% upward to $1.05 over the past month. The stock has climbed 10% during the past six months.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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