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Will Growth in Seniors Housing Market Aid HCP's Q3 Earnings?

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HCP Inc. HCP is slated to report third-quarter 2019 results on Oct 30, after the market closes. While its revenues are expected to display year-over-year improvement, funds from operations (FFO) per share might reflect a decline.

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 decent performance of the company’s life-science and medical-office segments.

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 1.75%. 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

Fundamentals of the seniors housing industry remained favorable nationwide during the third quarter, supported by decent occupancy and demand.

Data from the National Investment Center for Seniors Housing & Care (NIC) indicates that seniors housing occupancy rate in the United States registered a sequential expansion of 30 basis points (bps) to 88% during the quarter. This was aided by increase in occupancy at independent living (IL) properties and assisted living (AL) properties. As compared with the prior quarter, third-quarter occupancy at IL properties advanced 20 bps to 90.2%, while the same at AL properties climbed 30 bps to 85.4%.   

Although developers have been adding seniors housing properties to the market, in a bid to benefit from the upcoming silver tsunami, rising construction costs and lower development yields have cooled down the construction pipeline. The 30-basis point sequential decline in annual inventory growth during the quarter under review highlights the decline in construction starts for new seniors housing units.

Sluggish growth in development activities, along with favorable demand trends, is expected to have aided performance of healthcare REITS in third-quarter 2019.

Notably, this July, HCP acquired a portfolio of five senior housing properties with 430 units operated by Oakmont for $284 million. Further, the company has considerably fortified its portfolio by executing a portfolio-repositioning strategy that underpins opportunistic acquisitions, operator transitions and non-core dispositions.

These efforts are anticipated to have boosted the company’s rental and related revenue growth during the quarter. In fact, the Zacks Consensus Estimate for third-quarter 2019 rental and related revenues is pinned at $309 million and indicates 17.5% year-over-year improvement.

However, income from direct financing lease for the September-end quarter is projected at $10.5 million, suggesting a 22.6% decline year on year.

Accordingly, total revenues for the quarter are pegged at approximately $505.3 million, suggesting year-over-year growth of 10.8%.

Nevertheless, HCP’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for third-quarter FFO remained unchanged at 43 cents in a month’s time. In addition, it indicates a 2.3% year-over-year decline.

Earnings Whispers

Our proven model doesn’t conclusively predict a positive surprise in terms of FFO per share for HCP this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. That is not the case here, as you will see below.

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

Earnings ESP: HCP’s Earnings ESP is -1.39%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Digital Realty Trust, Inc. DLR, scheduled to release earnings on Oct 29, has an Earnings ESP of +2.61% and carries a Zacks Rank of 3, at present.

Senior Housing Properties Trust , slated to report July-September quarter results on Nov 7, has an Earnings ESP of +3.23% and currently holds a Zacks Rank of 2.

Stag Industrial, Inc. STAG, set to release quarterly figures on Oct 30, has an Earnings ESP of +3.30% and carries a Zacks Rank of 3, at present.

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.

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