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Can Portfolio Repositioning Aid HCP Amid Supply Concerns?

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In a bid to reposition its portfolio, HCP Inc. (HCP - Free Report) has resorted to opportunistic acquisitions and non-core dispositions. The company is reducing its senior housing triple-net footprint and focusing on senior housing operatingportfolio (SHOP). However, rising supply of senior housing assets may reduce the company’s ability to recycle capital out of non-core assets.

Notably, progressing toward reducing Brookdale’s contribution in its portfolio, in the first seven months of 2018, HCP sold Brookdale assets worth $700 million and is under contract to sell another $500 million.

Also, operator transitions for the company’s healthcare assets will likely improve the company’s performance over the long run.

These strategic transformations are in line with the rising expenditure trend of senior citizens on healthcare services. In fact, as baby boomers age, demand for outpatient services, medical offices and senior housing assets is anticipated to shoot up. Hence, we believe, in the years ahead, HCP is well poised to capture the healthcare expenditure of senior citizens.

Also, the company has decent financial muscle to support its growth plans. With an investment-grade balance sheet and a Baa2 rating from Moody’s, HCP continues to de-lever its balance sheet. In fact, in first-half 2018, it repaid nearly $1 billion of debt.

Shares of this Zacks Rank #3 (Hold) company have outperformed the industry it belongs to, over the past six months. Its shares have gained 14%, while the industry has recorded growth of 7.1% during this time frame.


 

Nonetheless, prevalent softness in the senior housing fundamentals might dampen the company’s pricing power and occupancy level. 

Furthermore, in a bid to enhance its core portfolio, HCP is selling off considerable part of its portfolio and using the proceeds in debt repayment. Although such efforts are a strategic fit for the long term, the dilutive impact on earnings in the near term from the sale of assets is unavoidable.

Also, tenant and operator concentration remain a primary risk for HCP since it generates a major chunk of its revenues from these tenants. Hence, failure on part of these tenants or operators to meet their obligations would adversely impact HCP’s cash flow.

Lastly, rising interest rates is a challenge for HCP as the company has substantial exposure to long-term leased assets. Additionally, any rise in rates will increase the cost of financing acquisitions, as well as investment and development-activity expenses, and lower the amount that third parties would be ready to pay for the company’s assets at disposal.

Key Picks

Better-ranked stocks from the REIT space include VICI Properties (VICI - Free Report) , Park Hotels and Resorts, Inc. (PK - Free Report) and W.P. Carey Inc. (WPC - Free Report) . All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

VICI Properties’ Zacks Consensus Estimate for 2018 FFO per share has been revised upward by a cent to $1.50 over the past 60 days. Its shares have gained 10.6% in the past six months.

Park Hotels and Resorts’ FFO per share estimates for 2018 witnessed 2% upward revision to $2.93 in two months’ time. Its shares have appreciated 24.4% over the past six months.

W.P.Carry’s FFO per share estimates for the current year moved up marginally in the past 30 days to $5.14. The stock has rallied 5.5% in six months’ time.

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