HCP Q3 FFO Misses Despite Revenue Gain, Guides Higher - Analyst Blog

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HCP Inc. ( HCP ) - a healthcare real estate investment trust (REIT) - reported third-quarter 2014 adjusted FFO (funds from operations) per share of 75 cents, a penny short of the Zacks Consensus Estimate and down 4 cents from the year-ago quarter figure. Despite a rise in revenues, the company missed estimates on higher expenses.

Total revenue came in at around $596.6 million, reflecting an increase of 9.2% from the year-ago quarter. Total revenue also exceeded the Zacks Consensus Estimate of $545 million. However, total costs and expenses climbed 7.6% year over year to $358.8 million. The company's adjusted same-property cash net operating income (NOI) reached $388.2 million, growing 3.2% year over year.

Behind the Headlines

The third quarter was quite eventful for HCP, which witnessed closure of the previously announced Brookdale deal. In fact, HCP completed $834 million of investment transactions and this included $588 million for its 49% stake in the continuing care retirement communities (CCRC) JV, related to the Brookdale deal. The remaining $246 million were for other investments.

During the quarter, the company accomplished 937,000 square feet of leasing in the life science and medical office segments. This comprised 712,000 square feet of renewals and 225,000 square feet of new leases. Life science occupancy came in at 93.7%, denoting an all-time high for this segment, while medical office occupancy increased to 90.8% as of Sep 30, 2014.

Debt Investment in a UK Care Home Portfolio

In November, HCP announced a $630 million (£395 million) debt investment in a UK care home portfolio by committing to become the lead investor in the funding for Formation Capital and Safanad's awaited purchase of NHP. This company enjoys ownership of 273 nursing and residential care homes in the UK. A loan facility to be secured by NHP's properties would be offered.

This acquisition and its funding are expected to take place later this month. With a five-year term, this facility is predicted to realize a blended 8.2% yield-to-maturity.


At the end of the quarter, HCP had cash and cash equivalents of $83.5 million, up from $54.1 million at the prior-quarter end. During the reported quarter, the company raised $800 million of 3.875% senior unsecured notes due 2024.

Raises Outlook

HCP raised its full-year 2014 outlook. After including the benefit from the committed UK debt investment, the company projects 2014 full year FFO between $3.03 and $3.09 per share, while FFO as adjusted is expected in the range of $2.98 - $3.04 per share.

This reflects an uptick from the prior guided range of $3.01 - $3.07 for FFO per share and $2.97 - $3.03 per share for FFO as adjusted. The Zacks Consensus Estimate of $3.03 per share for full-year 2014 comes in the estimated range. Notably, the projections do not incorporate the probable impact of future acquisitions.

Dividend Update

Recently, HCP announced a quarterly cash dividend of 54.5 cents per share. The dividend will be paid on Nov 25, 2014 to stockholders of record on Nov 10.

In Conclusion

While an estimate miss even by a cent is discouraging, we believe that in the long run, HCP would benefit from its diversified portfolio, increasing healthcare spending and an aging population. Further, the strategic acquisitions, tie-ups, opportunistic investments and decent cash flows would add momentum to the company's growth. Nevertheless, cut-throat competition remain a matter of concern for the company.

HCP currently has a Zacks Rank #3 (Hold). Investors interested in the REIT industry may consider better-ranked stocks like Cousins Properties Inc. ( CUZ ), Host Hotels & Resorts, Inc. ( HST ) and Public Storage ( PSA ). All of these 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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