WELL Welltower OP Inc

Aided by growth in revenues, HCP Inc. (HCP) – a healthcare real estate investment trust (REIT) – reported third quarter 2013 adjusted FFO (funds from operations) per share of 79 cents, 2 cents ahead of the Zacks Consensus Estimate and 10 cents above the prior-year quarter figure.

HCP reported total revenue of nearly $544.0 million during the quarter, reflecting an increase of 16.2% from the year-ago period. Total revenue also exceeded the Zacks Consensus Estimate of $514 million.

Adjusted same-property net operating income (NOI) of the company reached $359.8 million in the quarter depicting growth of 3.7% year over year.

Notably, the company received £129 million ($202 million) from the par payoff of its Barchester debt investments. This led to an income of 5 cents per share. Including severance-related charges for the termination of the company’s former Chairman, Chief Executive Officer and President on Oct 2, 2013 as well as impairments in the prior-year quarter, FFO came in at 73 cents per share, up from 67 cents reported in the prior-year period.

Notable Activities

During the quarter, HCP funded $55 million for construction and other capital projects, mainly in its life science, medical office and senior housing divisions. Moreover, in July, the company extended its ties with life science tenant, Roche/Genentech, in South San Francisco, CA. In particular, HCP executed a new five-year lease for a 63,000 sq. ft. building, leading to a total of 857,000 sq. ft. in leasing.

In September, HCP bought a 60-bed inpatient rehabilitation facility from Kindred Healthcare in Webster, Texas that was valued at $15 million. As part of the exchange, the company sold a 62-bed hospital in Greenfield, WI. The move resulted in a gain of $8 million and helped improve the master lease coverage.

Following the quarter end, HCP established its ties with a genomic diagnostics tenant, CardioDx, at its Redwood City, California life science campus, through the execution of an eight-year, 69,000 sq. ft. new lease deal. Notably, the lease with CardioDx will anchor around 75% of two redevelopment buildings that were repositioned in 2011.

The company also disclosed the resignation of James F. Flaherty from its board of directors on Oct 28.

Liquidity

At the end of the quarter, HCP had cash and cash equivalents of $49.4 million, down from $53.1 million at the prior-quarter end.

Outlook

HCP expects adjusted FFO to range between $2.97 and $3.03 per share for full-year 2013. The mid-point of the estimate reflects a rise of 8% over the 2012 comparable figure. The estimates exclude the impact of any future acquisitions or dispositions.

Dividend Update

On Oct 24, 2013, HCP announced a quarterly common stock cash dividend of 52.5 cents per share. The dividend will be paid on Nov 19, 2013 to stockholders of record as of the close of business on Nov 4.

In Conclusion

We believe that going forward, HCP is well poised for a strong growth trajectory given its well-balanced, diversified portfolio, opportunistic acquisitions, aging population, rising healthcare expenses, decent balance sheet, and improving credit metrics.

However, the company’s dependence on a limited number of operators and tenants for a large share of its revenues is a concern. Also, cut-throat competition remains a deterrent.  

HCP currently carries a Zacks Rank #3 (Hold).

Another healthcare REIT, Ventas Inc. (VTR), reported third-quarter 2013 normalized funds from operations (FFO) per share of $1.04, which exceeded the Zacks Consensus Estimate of $1.02 by nearly 2% and the year-ago quarter figure by 8.3%.

Results were driven by strategic investments made this year and last year. In particular, the company experienced an uptick in net operating income in its private pay seniors housing communities, triple-net lease portfolio and medical office building segment.

We now look forward to the results of Healthcare Realty Trust Inc. (HR) (scheduled to report on Oct 30) and Health Care REIT Inc. (HCN) (Nov 5).

Note: FFO, 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.

 
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