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Neutral Stance on HCP

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On Jun 7, 2013, we restated our long-term recommendation on healthcare real estate investment trust (REIT) – HCP Inc. (HCP - Free Report) – at Neutral. The decision is based on the company’s improved core operations and successful execution of strategic repositioning initiatives in first-quarter 2013. However, the company’s reliance on a few tenants for revenue generation are plausible risks.

Why Neutral?

HCP posted better-than-expected results for first-quarter 2013, with adjusted FFO (funds from operations) of 74 cents per share, 2.8% ahead of the Zacks Consensus Estimate of 72 cents and 10.4% above the prior-year quarter figure of 67 cents per share. The performance was aided by gains from accretive acquisitions done in the later part of 2012. Encouragingly, HCP increased its full-year 2013 guidance as well.

This REIT has one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities. Its diverse product mix facilitates the exploration of opportunities available in various areas, based on individual market dynamics. This has led to a decent increase in HCP’s revenues in recent years.

However, as a large portion of the company’s revenues originates from a few operators and tenants, it has substantial concentration risks. During first-quarter 2013, roughly 48% of the total revenues were generated through leasing or financial deals with the following companies – HCR ManorCare (31%), Emeritus (7%), Sunrise (5%), and Brookdale (5%). Additionally, HCP’s acquisition spree involves significant upfront costs. These remain a drag as new properties usually take time to generate revenues.

Following the release of first-quarter 2013 results, over the last 30 days, the Zacks Consensus Estimate for 2013 remained stable at $2.98 per share. Also, for 2014, it remained constant at $3.14 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 National Health Investors, Inc. (NHI - Free Report) , Omega Healthcare Investors Inc. (OHI - Free Report) and Extra Space Storage Inc. (EXR - Free 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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