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Real estate investment trust (REIT) – HCP Inc. (HCP - Analyst Report) –narrowly missed the Zacks Consensus Estimate in the second quarter of 2013. The company reported FFO (funds from operations) per share of 72 cents, 2 cents below the Zacks Consensus Estimate of 74 cents. Results reflected a lower-than-expected growth in revenue and rise in expenses.

However, FFO per share were above the prior-year quarter figure of 69 cents. HCP reported total revenue of $516.3 million during the quarter, reflecting an increase of 12.1% from the year-ago period. Yet, total revenue fell short of the Zacks Consensus Estimate of $534 million.

Adjusted same-property net operating income (NOI) of the company reached $366.8 million in the quarter, 3.5 % ahead of $354.4 million reported in the year-ago period.

Notable Activities

During the quarter, HCP completed $367 million of investment transactions. This included £109 million ($170 million) UK mezzanine debt investment, purchased at a discount, $102 million funding under a mezzanine loan facility and $95 million of acquisitions and capital investments.

Following the quarter end, HCP extended its ties with life science tenant, Roche/Genentech, in South San Francisco, Calif. In particular, HCP executed a new five-year lease for a 63,000 sq. ft. building, leading to a total of 857,000 sq. ft. in leasing.

HCP earned two ENERGY STAR labels in its medical office and life science segments, resulting in a total of 104 labels. The company also appointed Brian G. Cartwright to its board of directors.

At the end of the quarter, HCP had cash and cash equivalents of $53.1 million, up from $47.5 million at the prior-quarter end.

Raises Outlook

Encouragingly, HCP has increased its full-year 2013 guidance. The company now expects FFO in the range of $2.96 – $3.02 per share compared with the prior range of $2.94 – $3.00 per share. The estimates exclude the impact of any future acquisitions or dispositions. The outlook, however, incorporates a favorable impact of 3 cents per share, net of transaction costs resulting from the par payoff of its Barchester debt investment in Sep 2013.

Dividend Update

On Jul 25, 2013, HCP announced a quarterly common stock cash dividend of 52.5 cents per share. The dividend will be paid on Aug 20, 2013 to stockholders of record as of the close of business on Aug 5. Notably, the company had made a 5% hike in its quarterly cash dividend rate in January this year.

In Conclusion

While lower-than-expected results at HCP is discouraging, we believe that with one of the most diversified portfolios in the healthcare sector, the company remains well poised to ride on the growth trajectory. Strategic acquisitions like that of the Senior Housing portfolio augurs well.

Encouragingly, HCP has increased its full-year 2013 guidance as well. Moreover, the relatively immune healthcare sector offers HCP a steady source of income that insulates the company from short-term market volatility. Yet, cut-throat competition in the healthcare industry, as well as continuous acquisitions, should lead to a rise in upfront operating expenses.

HCP currently carries a Zacks Rank #3 (Hold). We now look forward to the results of Healthcare Realty Trust Inc. (HR - Snapshot Report) that is also scheduled to report this week.

Other REIT stocks that are performing better and deserve a look are Diamondrock Hospitality Co. (DRH - Snapshot Report) and Winthrop Realty Trust (FUR - Snapshot Report). Both these stocks carry a Zacks Rank #1 (Strong 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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