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Will Rising Healthcare Spending Aid HCP This Earnings Season?

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HCP Inc. HCP is slated to report second-quarter 2018 results on Aug 2, before the opening bell. Though the company’s performance will likely reflect a year-over-year decline in funds from operations (FFO), its top-line results are anticipated to display growth.

In the last reported quarter, this Irvine, CA-based healthcare REIT delivered a positive surprise of 4.35%, in terms of FFO per share. Results reflected moderate growth coming from the company’s life-science, senior-housing triple-net, as well as the medical office portfolio.

The company has an impressive surprise history. In fact, over the trailing four quarters, this REIT exceeded estimates in each occasion, coming up with an average positive beat of 3.24%. This is depicted in the graph below.

HCP, Inc. Price and EPS Surprise
 


HCP, Inc. Price and EPS Surprise | HCP, Inc. Quote

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

Factors to Consider

Healthcare REITs like Ventas Inc. VTR, Welltower Inc WELL, Healthcare Realty Trust HR and HCP are well poised to benefit from the rising healthcare spending and aging population. Also, senior citizens constitute the major customer base of healthcare services — they end up spending more on healthcare services compared to the average population. Hence, with a high quality portfolio, HCP is well poised to capitalize on this expenditure trend of senior citizens on healthcare services.

In the to-be-reported quarter, the company is likely to have gained from rising healthcare spending and a growing aging population. In fact, the Zacks Consensus Estimate for Q2 rental and related revenues of $282 million indicates a slight increase from the previous quarter’s reported tally of $280 million.   

Importantly, strategic divestitures, in a bid to lower its Brookdale-portfolio concentration, are anticipated to have driven the company’s Q2 performance. This June, it announced the disposition of five Brookdale communities for $32 million and is under contract to sell another 15 communities for $98 million. It also opted for transition of management of a portfolio of 24 senior housing communities from Brookdale to Atria Senior Living, Inc. This move will considerably bring down Brookdale’s concentration in HCP’s portfolio, and increase lease coverage of the remaining triple-net assets leased to Brookdale.

Nonetheless, senior living providers have been facing operational and financial challenging times, thanks to the fall in private-pay healthcare, low margins and heavy government control. Amid these, a reduction in Brookdale’s concentration — which is one of the largest senior living providers — bodes well.  

In its life-science segment, we estimate occupancy to have shrunk 100 basis points (bps) as compared to the previous quarter, while revenues are anticipated to be nearly $100 million. Also, the Zacks Consensus Estimate for revenues from medical office is pegged at $124 million.

Notably, a rising interest rate scenario also remains a concern for HCP. We anticipate the company to have incurred higher interest expense in Q2, which might weigh on its bottom line.

In fact, HCP’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for Q2 FFO remained unchanged at 46 cents in a month’s time. Furthermore, it indicates a 4.2% 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 +0.60%.

Zacks Rank: HCP carries a Zacks Rank of 4 (Sell) which reduces the predictive power of the model.

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

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

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HCP, Inc. (HCP) : Free Stock Analysis Report
 
Ventas, Inc. (VTR) : Free Stock Analysis Report
 
Healthcare Realty Trust Incorporated (HR) : Free Stock Analysis Report
 
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