Earnings Scorecard: HCP Inc.

Feb.27.11 | About: HCP, Inc. (HCP)

HCP Inc. (NYSE:HCP), a leading healthcare real estate investment trust (REIT), reported fiscal 2010 fourth quarter recurring funds from operations (FFO) of 64 cents per share, which beat the Zacks Consensus Estimate by 5 cents.

Funds from operations, 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.

We cover below the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.

Earnings Report Review

For full year 2010, HCP reported FFO of $619.4 million or $2.02 per share, compared with $412.5 million or $1.50 in the previous year. Recurring FFO for the reported fiscal was $683.5 million or $2.23 per share compared to $590.0 million or $2.14 in 2009. Fiscal 2010 recurring FFO exceeded the Zacks Consensus Estimate by 4 cents.

HCP reported total revenues of $341.4 million during the quarter compared with $294.5 million in the year-ago period. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $304.0 million.

For full year 2010, HCP reported total revenues of $1.3 billion compared with $1.1 billion in the year-ago period. Total revenues for the reported fiscal were well ahead of the Zacks Consensus Estimate of $1.1 billion.

Earnings Estimate Revisions - Overview

Fiscal earnings estimates have moved in both directions for HCP since the earnings release, meaning that analysts are neutral about the long-term performance of the company. Let’s dig into the earnings estimate details.

Agreement of Estimate Revisions

In the last 7 days, fiscal 2011 earnings estimates were raised by 1 analyst out of 14 covering the stock, while none had lowered the same. For fiscal 2012, none out of 16 analysts covering the stock have revised their estimates upward, while only 1 has lowered it during the same time period.

This indicates no clear directional movement for the fiscal year earnings and signifies that the analysts are circumspect about the long-term trend earnings of the company.

Magnitude of Estimate Revisions

Earnings estimates for fiscal 2011 have decreased by a penny in the last 7 days to $2.54. For full year 2011, HCP expects FFO before non-recurring items in the range of $2.58 to $2.64 per share. For fiscal 2012, earnings estimates have also decreased by a penny to $2.84 during the same time period.

Management expects a steady improvement in the overall results of the company through a well-balanced portfolio of higher growth senior housing operating assets and stable revenue-generating medical office buildings.

Moving Forward

The long-term earnings estimate picture for HCP is neutral. HCP is the leading medical REIT in the U.S. with one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities.

The product diversity of the company allows it to capitalize on opportunities in different markets based on individual market dynamics, and provides a hard-to-replicate competitive advantage over its peers.

Healthcare is also relatively immune to the economic problems faced by office, retail and apartment companies. Consumers will continue to spend on healthcare while cutting out discretionary purchases.

The healthcare industry is the single largest industry in the U.S., based on Gross Domestic Product (GDP), and offers stability to the company in a volatile market.

However, one of the biggest risks to healthcare focused REITs is government reimbursement rates, which are proposed to be reduced in the coming years. Deep cuts in Medicare have been proposed over the next five years by reducing or freezing payments to skilled nursing facilities, hospitals, and other healthcare providers.

With a large portion of HCP’s revenues being determined by government payout rates, forces beyond its direct control could negatively affect revenue and operator coverage ratios.

We maintain our Neutral rating on HCP, which currently has a Zacks #3 Rank that translates into a short-term Hold rating, indicating that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months. We also have a Neutral recommendation and a Zacks #3 Rank for Nationwide Health Properties Inc. (NYSE:NHP), one of the competitors of HCP.