Will Operator Transitions Hit HCP's Occupancy In Q4 Earnings?

HCP Inc. (NYSE:HCP) is slated to report fourth-quarter and 2018 results on Feb 13, after the market closes. Though the company’s performance will likely reflect a year-over-year decline in funds from operations (FFO), its top-line results are anticipated to display growth.

In the last reported quarter, this Irvine, CA-based healthcare real estate investment trust (REIT) delivered a positive surprise of 2.33%, in terms of adjusted FFO per share. Results were supported by decent performance of the company’s life-science and medical-office segment.

The company has an impressive surprise history. In fact, over the trailing four quarters, this REIT exceeded estimates in each occasion, coming up with average positive beat of 2.75%. This is depicted in the graph below.

HCP, Inc. Price and EPS Surprise

Let’s see how things are shaping up, prior to this announcement.

Factors to Consider

With exposure to a variety of healthcare real estate assets, HCP’s fourth-quarter performance is expected to be buoyed by strength of the underlying asset classes.

Notably, soaring demand for medical office buildings is expected to drive revenues in its Life-Science and Medical Office segment. In fact, segmental revenues are anticipated to marginally improve to $81 million sequentially in the quarter.

Also, per an article by National Investment Center for Seniors Housing & Care, fundamentals of the senior housing real estate assets improved in the quarter, but remained soft. In fact, occupancy rate for seniors housing (including properties still in lease up) expanded 10 basis points (bps) sequentially to 88%. Further, net absorption came in at 5,149 units, indicating the highest quarterly units absorbed since first-quarter 2006.

Amid these, net operating income from the company’s senior housing operating portfolio is expected to witness sequential growth of 7.1% to $33.06 million.

However, revenues from interest and other income are pegged at $1.21 million, indicating a sequential decline of 2.4%. Furthermore, marginal decline in tenant recoveries, as well as resident fees and services, is expected to curb top-line growth.

Also, as the company remains focused on lowering its Brookdale-portfolio concentration, operation transitions to new partners is expected to have impacted its portfolio occupancy.

Furthermore, rising interest rates remain an impeding factor for the company. Since HCP has decent exposure to long-term leased assets that are subject to annual escalations and depends on debt for its acquisition financing, we expect the company to witness higher interest expense for the Dec-end quarter. This, in turn, is anticipated to have curbed bottom-line growth.

In fact, HCP’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for Q4 FFO remained unchanged at 43 cents in a month’s time. In addition, it indicates a 10.42% year-over-year decline.

Earnings Whispers

Our proven model does not show that HCP has the right combination of the two key ingredients — positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat in the fourth quarter.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for HCP is -0.46%.

Zacks Rank: HCP carries a Zacks Rank of 3, at present.

Stocks That Warrant a Look

While other players in the REIT space are lined up to report their financial results, below are three stocks, poised to beat on earnings per the proven Zacks model. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hersha Hospitality Trust (NYSE:HT) , slated to report fourth-quarter results on Feb 25, has an Earnings ESP of +3.81% and holds a Zacks Rank of 2.

American Tower Corporation (NYSE:AMT) , set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

Federal Realty Investment Trust (NYSE:FRT) , scheduled to report quarterly numbers on Feb 13, has an Earnings ESP of +1.53% and carries a Zacks Rank of 3.

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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