Back to top

Image: Bigstock

Key Factors Setting the Tone for HCP This Earnings Season

Read MoreHide Full Article

HCP Inc. (HCP - Free Report) is slated to report second-quarter 2019 results on Jul 31, after the market closes. The company’s performance will likely reflect a year-over-year (y/y) decline in funds from operations (FFO) and revenues.

In the last reported quarter, this Irvine, CA-based healthcare real estate investment trust (REIT) posted FFO as adjusted of 44 cents per share, surpassing the Zacks Consensus Estimate of 43 cents. Results were supported by the company’s life-science and medical-office segments’ decent performance. However, decline in rental and related revenues unfavorably impacted top-line growth.

Over the trailing four quarters, the company exceeded estimates on three occasions and met in the other, coming up with an average positive beat of 1.71%. This is depicted in the graph below.

HCP, Inc. Price and EPS Surprise
 

Let’s see how things are shaping up, prior to this announcement.

Factors to Consider

Data from the National Investment Center for Seniors Housing & Care (NIC) indicates that the fundamentals of the seniors housing industry weakened nationwide during the second quarter, with occupancy rates dropping to the lowest level occupancy level since second-quarter 2011.

In fact, senior housing occupancy rate in the United States decreased to 87.8% during the quarter under review, indicating a sequential contraction of 20 basis points (bps). Additionally, annual rent growth shrunk 20 bps sequentially to 2.9%.

Notably, excess speculative supply of seniors housing properties has likely dampened the performance of the seniors housing market.

Although developers have been adding senior housing properties to the market at an aggressive pace since 2014, rising construction costs and lower development yields have cooled down the construction pipeline recently. This downward trend in construction starts for new senior housing units is evident from the 10-bps decline in annual inventory growth during the quarter.

Given these quarterly statistics, performance of the company’s seniors housing portfolio will likely be hindered, thereby impacting top-line growth. In fact, second-quarter 2019 resident fees and income is pinned at $125 million, denoting a y/y decline of 8.8%. Further, total revenues for the quarter are pegged at approximately $447 million, suggesting a y/y decline of 4.8%.

Notably, timely execution of its portfolio-repositioning strategy has enabled HCP to own asset across multiple segments of healthcare. This includes seniors housing, medical office buildings (MOBs), life sciences, and to a lesser extent, hospitals.

In fact, recent efforts to enhance its MOB and life-sciences portfolio include the acquisition of CambridgePark for $98 million and an additional $70 million of investment added to the MOB-development program with HCA. Consequently, HCP’s premium MOB and life-sciences portfolio accounts for around 56% of portfolio net operating income (NOI).

In May, HCP closed an amended and restated credit agreement offering the company a $2.5-billion unsecured revolving credit facility and a new $250-million unsecured term loan facility. The amendment inflated the size of the unsecured revolving credit facility from $2 billion to $2.5 billion, and extended the due date of the unsecured revolving credit facility to May 23, 2023, with two six-month extension options.The company has been making concerted efforts to strengthen its balance sheet and enhance debt-maturity ladder.

These balance-sheet fortification efforts will likely come handy in the second quarter. Also, the Zacks Consensus Estimate for interest and other income is pegged at $1.7 million, improving 17% on a year-over-year basis. 

Nevertheless, HCP’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for second-quarter FFO remained unchanged at 43 cents in a month’s time. In addition, it indicates an 8.5% year-over-year decline.

Earnings Whispers

Our proven model does not show that HCP has the right combination of the two key ingredients — positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat in the second quarter.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for HCP is -0.23%.

Zacks Rank: HCP carries a Zacks Rank of 3, at present.

Stocks That Warrant a Look

CyrusOne Inc. (CONE - Free Report) , scheduled to release earnings on Aug 1, has an Earnings ESP of +1.37% and carries a Zacks Rank #3, at present.

Corporate Office Properties Trust (OFC - Free Report) , slated to report quarterly figures on Jul 29, has an Earnings ESP of +0.66% and carries a Zacks Rank of 3, currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Healthcare Realty Trust Incorporated (HR - Free Report) , set to release June-end quarter results on Jul 30, has an Earnings ESP of +0.72% and currently holds a Zacks Rank #3.

 Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

Biggest Tech Breakthrough in a Generation

Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.

A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 7 stocks to watch. The report is only available for a limited time.

See 7 breakthrough stocks now>>