Will HCP's Endeavors to Revamp Portfolio be Sufficient?

HCP Inc. HCP has undertaken portfolio-repositioning measures in a bid to improve the quality of its senior housing portfolio and lower the concentration of Brookdale Senior Living Inc. Earlier in this month, HCP provided an update about such efforts and it seems right on track to achieve its target.

In fact, over time, with diligent measures, the company aims at having more than half of its business comprising specialty office segments of medical office and life science, and lower senior housing concentration to around 40%. The focus on having a diversified private pay portfolio is likely to drive long-term growth.

Nevertheless, the softness in the seniors housing market fundamentals amid new supply is anticipated to thwart the company’s pricing power. Further, the hike in interest rate and stiff competition remain concerns for the company.

Per its recent update, HCP has reaped $332 million of proceeds through the completion of the disposition of its residual investment in the RIDEA II senior housing joint venture (JV) to an investor group led by Columbia Pacific Advisors, LLC. Notably, this JV owned 49 communities and 46 of them were managed by Brookdale.

Regarding Brookdale 25 asset sales, the company has already accomplished the disposition of five communities for $32 million and is under contract to sell another 15 communities for $98 million. The remaining five assets are expected to be either sold or transitioned this year too.

Further, HCP is focused on making acquisitions to enhance its overall portfolio mix. The company acquired Hayden Research Campus in the Boston life-science market in December 2017 and is experiencing strong leasing velocity. Moreover, in March 2018, the company acquired development rights at Hayden for $21 million and its planned 214,000-square-foot Class A development is expected to improve the company’s scale in this leading life science market. Also, the company started Phase I of Sierra Point, which marks its next key life-science development in the South San Francisco market.

In fact, increasing longevity of the aging U.S. population, along with growth opportunities related to biopharma drug development, have promoted life science and medical-market fundamentals. The trend is expected to continue in the upcoming years, giving significant impetus for growth to HCP.

Moreover, national healthcare expenditure is expected to rise in the future and as senior citizens constitute the major customer base of healthcare services – they end up spending more on healthcare services compared with the average population. Hence, with an expectation of rising senior citizens’ population in the years ahead, we believe that HCP has a strong upside potential, being well poised to capitalize on this expenditure trend of senior citizens on healthcare services.

However, softness in the seniors housing fundamentals is likely to continue in the upcoming quarters, amid rise in new supply in the market. This is anticipated to adversely affect the company’s pricing power and occupancy level. In addition, the cut-throat competitive market makes it more challenging for the company to increase its rent and occupancy level. The competition also makes it hard to identify and successfully capitalize on acquisition opportunities to meet the company’s objectives.

Moreover, the company is currently focusing on lowering its Brookdale-portfolio concentration. The move involves strategic efforts, including selling of 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.

Amid these, shares of this Zacks Rank #3 (Hold) company have underperformed its industry over the past six months, declining 7.4% against the industry’s decline of 2.4%.

 

Stocks to Consider

A few better-ranked stocks from the same space include Arbor Realty Trust ABR, LaSalle Hotel Properties LHO and Terreno Realty Corporation TRNO. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Arbor Realty’s Zacks Consensus Estimate for 2018 funds from operations (FFO) per share has remained unchanged at $1.03 over the past month. Its shares have returned 18% in the past six months.

LaSalle Hotel’s FFO per share estimates for 2018 have been marginally revised upward to $2.21 over the past month. The stock has gained 21.4% during the past six months.

Terreno Realty’s Zacks Consensus Estimate for 2018 FFO per share has remained stable at $1.28 over the past month. The stock has rallied 5.9% in six months’ time.

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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