HCP Inc (HCP) Q2 FFO Beats, Life Science Occupancy Peaks

HCP Inc. (NYSE:HCP) – a healthcare real estate investment trust (“REIT”) – reported second-quarter 2016 adjusted funds from operations (“FFO”) per share of 74 cents, beating the Zacks Consensus Estimate of 70 cents.

Results were driven by better-than-expected growth in revenues. However, adjusted FFO per share was down 5 cents from a year ago.

The company posted revenues of $662.2 million, which beat the Zacks Consensus Estimate of $635.2 million. It also compared favorably with the year-ago figure of $607.5 million.

Behind the Headlines

HCP attained year-over-year three-month cash same property portfolio net operating income (NOI) growth of 4.4%, excluding the assets being transferred to Quality Care Properties, Inc. ("QCP") (previously HCP SpinCo, Inc).

The company executed 1.3 million square feet of leasing in its life science and medical office portfolios, comprising 858,000 square feet of renewals and 435,000 square feet of new leases. While occupancy for the life science portfolio reached 98.7%, representing a new all-time high, the same was 91.6% for medical office portfolio.

HCP announced $111 million of investment activities for the second quarter and through Aug 8, 2016, bringing year-to-date total investments to $475 million. Further, the company completed $282 million of dispositions during the second quarter.

HCP exited second-quarter 2016 with cash and cash equivalents of $116.5 million, down from $346.5 million at 2015 end. It ended the quarter with $0.9 billion drawn on its revolving line of credit facility and $1.1 billion of remaining capacity.

Spin Transaction Update

Notably, QCP filed an amended Registration Statement on Form 10 with the Securities and Exchange Commission in Aug 2016. This is in sync with the company’s prior-disclosed plan to spin off HCR ManorCare portfolio, and other skilled nursing facilities, into an independent publicly traded REIT. This spin transaction is expected to close in fourth-quarter 2016 subject to specific requirements.

2016 Outlook

HCP expects full-year 2016 adjusted FFO guidance for 2016 in a range of $2.83–$2.89. The company anticipates 2016 same property portfolio cash NOI growth, excluding QCP, in the 2.3–3.3% range.

Conclusion

We believe that HCP stands to benefit from its diversified portfolio, increases in healthcare spending and an aging population in the long run. Strategic investments, tie-ups and opportunistic acquisitions are expected to drive decent cash flow. Yet, cut-throat competition and any rise in interest rate continue to pose challenges before the company.

HCP currently has a Zacks Rank #2 (Buy).

Investors interested in the REIT industry can consider other stocks like Apple (NASDAQ:AAPL) Hospitality REIT, Inc. (NYSE:APLE) , LTC Properties Inc. (NYSE:LTC) and Omega Healthcare Investors Inc. (NYSE:OHI) . Each of these stocks carries the same Zacks Rank as HCP.

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. All EPS numbers presented in this write up represent FFO per share.