On Nov 26, 2013, we reiterated our long-term Neutral
recommendation on healthcare real estate investment trust (REIT),
). This is based on the company's strong third-quarter
performance, diversified portfolio, opportunistic acquisitions,
aging population, rising healthcare expenses and decent balance
However, the company's dependence on a limited number of
operators and tenants for the major portion of its revenues is a
concern. Also, cut-throat competition remains a challenge.
Why the Reiteration?
Aided by growth in revenues, HCP reported third-quarter 2013
adjusted FFO (funds from operations) per share of 79 cents, 2
cents ahead of the Zacks Consensus Estimate and 10 cents above
the prior-year quarter figure.
Recently, HCP inked a deal with
Tenet Healthcare Corp.
) to adjust and extend leases for three acute care hospitals. The
transaction is part of HCP's efforts to strengthen its
long-standing ties with Tenet Healthcare, and consequently
enhance its rental income.
Going forward, we believe HCP is well poised for strong growth,
given its well-balanced, diversified portfolio and opportunistic
acquisitions. The company has a strong balance sheet with
investment grade credit ratings. It has also increased its
dividend per share for 28 consecutive years.
Moreover, with an expectation of a rising senior citizens'
population in the years ahead, we believe that HCP has strong
upside potential as it can well capitalize on the increasing
expenditure trend of senior citizens on healthcare services.
However, for many of the company's tenants and operators, one of
the key sources of revenues is the governmental healthcare
programs such as the federal Medicare program and state Medicaid
programs and non-governmental payors. These remain a concern as
in the recent years governmental payors have reduced payments to
healthcare providers due to budgetary pressures.
Also, the company's dependence on a limited number of operators
and tenants for the major portion of its revenues is a concern
and cut-throat competition remains a challenge.
Consequently, over the last 30 days, the Zacks Consensus Estimate
for 2013 moved north by 0.3% to $2.99 per share. However, for
2014, the Zacks Consensus Estimate dipped 1.3% to $3.07 per
share. Hence, HCP currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better-ranked REITs include
Chatham Lodging Trust
Sabra Health Care REIT, Inc.
). Both the stocks carry a Zacks Rank #2 (Buy).
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.
CHATHAM LODGING (CLDT): Free Stock Analysis
HCP INC (HCP): Free Stock Analysis Report
SABRA HEALTHCR (SBRA): Free Stock Analysis
TENET HEALTH (THC): Free Stock Analysis
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