HCP Inc. (HCP) Q1 FFO Beats Estimates, Deleveraging On Track

HCP Inc. (NYSE:HCP) – a healthcare real estate investment trust (“REIT”) – reported first-quarter 2017 funds from operations (“FFO”) as adjusted of 51 cents per share, beating the Zacks Consensus Estimate of 48 cents.

Results were driven by growth in three-month same-property portfolio (SPP) cash net operating income (NOI). The figure also compared favorably with the year-ago quarter FFO as adjusted (excluding Quality Care Properties, Inc. contribution) of 48 cents per share.

The company also remains on track with its deleveraging plan and aims for net debt to EBITDA in the low-to-mid six-times range and a financial leverage in the 43–44% band by the end of 2017.

However, the company posted revenues of $492.2 million, which missed the Zacks Consensus Estimate of $522.6 million. The figure is also lower than the year-ago quarter’s tally of $520.5 million.

Importantly, during the quarter, HCP completed the previously announced sale of 64 triple-net assets leased to Brookdale Senior Living, Inc. at $1.125 billion. The company used the proceeds for debt repayment and meeting general corporate needs.

Behind the Headlines

HCP attained year-over-year three-month cash SPP NOI growth of 4.0%. Results were backed by solid senior housing triple-net and life science portfolio performances.

During the quarter, the company signed a 10-year lease during the quarter with biotechnology company – Global Blood Therapeutics, Inc. – for 67,000 square feet at Phase I of The Cove. This lease, expected to start in Dec 2017, makes Phases I and II of The Cove fully leased.

Moreover, in addition to the sale of a portfolio of 64 triple-net assets leased to Brookdale, the company completed the previously announced sale of a 40% stake in its RIDEA II senior housing joint venture and the associated financing of the venture. This helped the company generate $480 million of proceeds which were used for paying down its revolving credit facility. Also, during the reported quarter, HCP completed $121 million of additional dispositions.

HCP exited first-quarter 2017 with cash and cash equivalents of $764.1 million, up from $94.7 million at the end of 2016. It ended the quarter with $2.3 billion of liquidity from a combination of cash and availability under its $2.0 billion credit facility. During the first quarter, the company repaid $1.1 billion of debt using proceeds reaped from the Brookdale transactions and other dispositions.

2017 Outlook

HCP reaffirmed full-year 2017 FFO as adjusted and SPP Cash NOI guidance ranges. The company expects full-year 2017 FFO as adjusted per share in the $1.89–$1.95 band. The Zacks Consensus Estimate for the same is currently pegged at $1.93.

The company projects 2017 SPP cash NOI growth in the range of 2.5–3.5%.

Conclusion

We believe that HCP is well poised to benefit from its diversified portfolio, rise in healthcare spending and an aging population over the long run. Strategic divestitures and focus on deleveraging also augur well for long-term growth. However, rise in interest rate and cut-throat competition remain major concerns. Also, dilutive impact on earnings from sale of assets is unavoidable.

HCP currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We are now looking forward to the earnings releases of Healthcare Realty Trust Incorporated (NYSE:HR) , Federal Realty Investment Trust (NYSE:FRT) and Welltower Inc. (NYSE:HCN) , all of which are expected to report their quarterly figures this week.

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.


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