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Neutral Stance on HCP

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On Nov 26, 2013, we reiterated our long-term Neutral recommendation on healthcare real estate investment trust (REIT), HCP Inc. (HCP - Free Report) . This is based on the company’s strong third-quarter performance, diversified portfolio, opportunistic acquisitions, aging population, rising healthcare expenses and decent balance sheet.

However, the company’s dependence on a limited number of operators and tenants for the major portion of its revenues is a concern. Also, cut-throat competition remains a challenge.

Why the Reiteration?

Aided by growth in revenues, HCP reported third-quarter 2013 adjusted FFO (funds from operations) per share of 79 cents, 2 cents ahead of the Zacks Consensus Estimate and 10 cents above the prior-year quarter figure.

Recently, HCP inked a deal with Tenet Healthcare Corp. (THC - Free Report) to adjust and extend leases for three acute care hospitals. The transaction is part of HCP’s efforts to strengthen its long-standing ties with Tenet Healthcare, and consequently enhance its rental income.

Going forward, we believe HCP is well poised for strong growth, given its well-balanced, diversified portfolio and opportunistic acquisitions. The company has a strong balance sheet with investment grade credit ratings. It has also increased its dividend per share for 28 consecutive years.

Moreover, with an expectation of a rising senior citizens’ population in the years ahead, we believe that HCP has strong upside potential as it can well capitalize on the increasing expenditure trend of senior citizens on healthcare services.

However, for many of the company’s tenants and operators, one of the key sources of revenues is the governmental healthcare programs such as the federal Medicare program and state Medicaid programs and non-governmental payors. These remain a concern as in the recent years governmental payors have reduced payments to healthcare providers due to budgetary pressures.

Also, the company’s dependence on a limited number of operators and tenants for the major portion of its revenues is a concern and cut-throat competition remains a challenge.

Consequently, over the last 30 days, the Zacks Consensus Estimate for 2013 moved north by 0.3% to $2.99 per share. However, for 2014, the Zacks Consensus Estimate dipped 1.3% to $3.07 per share. Hence, HCP currently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked REITs include Chatham Lodging Trust (CLDT - Free Report) and Sabra Health Care REIT, Inc. (SBRA - Free Report) . Both the stocks carry a Zacks Rank #2 (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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