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On Aug 28, 2013, we reiterated our long-term recommendation on HCP Inc. (HCP - Analyst Report), a healthcare real estate investment trust (REIT) at Neutral. This was based on the company’s successful strategic investments in recent quarters, rising healthcare expenditures, decent balance sheet and enhanced full-year outlook. However, lower-than-expected second-quarter results as well as rising interest rates and capital market volatility remain plausible concerns.

Why Neutral?

HCP reported lower-than-expected second-quarter 2013 results, with reported FFO per share of 72 cents missing the Zacks Consensus Estimate by 2 cents. Results reflected lower-than-expected growth in revenues and rise in expenses.

Though the lower-than-expected results are discouraging, we believe that going forward, HCP is well poised to see a strong growth trajectory given its well-balanced, diversified portfolio, opportunistic acquisitions, aging population, rising healthcare expenses, decent balance sheet, and improving credit metrics.

In second-quarter 2013, HCP completed $367 million of investment transactions. Moreover, the company has raised its outlook for the year on one-time benefits and strategic investments.

Yet, the rising interest rates and capital market volatility have adversely impacted the deal volumes in recent times. Also, the company’s dependence on a limited number of operators and tenants for a large share of its revenues is a concern and cut-throat competition remains a deterrent.

Over the last 30 days, the Zacks Consensus Estimate for 2013 remained stable at $2.98 per share. However, for 2014, it dropped 0.3% to $3.13 per share. The stock now carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

REITs that are performing better and are worth a look include CubeSmart (CUBE - Snapshot Report), Douglas Emmett Inc. (DEI - Snapshot Report) and Highwoods Properties Inc. (HIW - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.

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