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Will Senior Housing Softness Impact HCP in Q1 Earnings?

Zacks Equity Research

HCP Inc. HCP is slated to report first-quarter 2019 results on May 1, after the market closes. The company’s performance will likely reflect a year-over-year (y/y) decline in funds from operations (FFO) and revenues.

In the last reported quarter, this Irvine, CA-based healthcare real estate investment trust’s (REIT) FFO as adjusted per share of 43 cents met the Zacks Consensus Estimate. Results were supported by decent performance of the company’s life-science and medical-office segment.

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 2.21%. 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

Data from the National Investment Center for Seniors Housing & Care (NIC) indicates that the fundamentals of the seniors housing industry remained soft during the first quarter. In fact, the industry seems to still tide through excess supply as indicated by the y/y decline in occupancy rates.

Specifically, the first-quarter occupancy rate of 88.1% indicates a y/y contraction of 20 basis points (bps) and an expansion of 10 bps on a sequential basis. Also, seniors housing’s average rate of annual asking rent growth was 3%, unrevised from fourth-quarter 2018.

Given these quarterly statistics, revenue growth for the company’s seniors housing portfolio will likely be hindered, thereby impacting top-line growth. In fact, first-quarter 2019 revenues are expected to be $439.8 million, declining 8.2% y/y.

Nonetheless, the investment thesis related to the silver tsunami is no secret. In fact, going by a presentation, nearly 10,000 baby boomers will turn 65 every day through 2030. As this long-awaited demographic boom is being realized, absorption rate for seniors housing units advanced 30 bps from the prior quarter to 3% as of first-quarter 2019.

Further, acknowledging HCP’s successful execution of its portfolio-repositioning strategy, the company’s unsecured debt rating was notched up to baa1 by Moody's in January.

In fact, over the past few years, the company has shed its skilled nursing business and disposed or transitioned significant non-core assets, enabling it to improve asset quality and achieve significant portfolio diversification.

This has enabled HCP to own asset across multiple segments of healthcare. This includes senior housing, medical office buildings (MOBs), life sciences, and to a lesser extent, hospitals. Further, HCP’s premium MOB and life-sciences portfolio is expected to perform well in the quarter under review, reducing the impact of the tormenting seniors housing market.

Additionally, balance-sheet fortification efforts will likely come handy in the first quarter. Also, the Zacks Consensus Estimate for interest and other income is pegged at $1.4 million, improving nearly 3% on a sequential basis. 

However, HCP’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for first-quarter FFO remained unchanged at 43 cents in a month’s time. In addition, it indicates a 10.4% 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 first 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 0.00%.

Zacks Rank: HCP carries a Zacks Rank of 3, at present.

Stocks That Warrant a Look

Several other players in this space are lined up to report their financial results. Below are three stocks, poised to beat on earnings per the proven Zacks model. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alexandria Real Estate Equities, Inc. ARE, scheduled to release earnings on Apr 29, has an Earnings ESP of +0.3% and currently carries a Zacks Rank of 2 (Buy).

Welltower, Inc. WELL, set to report quarterly numbers on Apr 30, has an Earnings ESP of +0.58% and carries a Zacks Rank of 3, currently.

Park Hotels & Resorts Inc. PK, slated to release quarterly figures on May 9, has an Earnings ESP of +0.24% and carries a Zacks Rank of 2.

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