This REIT is Shifting to Life Science and Medical Facilities

10/01/2019 5:00 am EST

Focus: REITS

Jacob Kilstein

Associate Analyst, Argus Research Company

We are upgrading our rating on HCP Inc. (HCP) from a "hold" to a "buy" based on the company’s shift in focus to life science and medical office buildings and away from senior housing and skilled nursing, observes Jacob Kilstein, editor at the indpendent Wall Street research firm, Argus Research.

HCP’s recent acquisition and development efforts should generate significantly more revenue than we had previously anticipated and help achieve higher net operating income (NOI).

Management is working to finish selling underperforming senior housing properties run by its largest operator, Brookdale. We are encouraged by growth in same-property NOI from the company’s core businesses and by several recent investments.

We are raising our 2019 adjusted FFO estimate per share to $1.75 from $1.74, based on better 2Q results than we had expected and management’s higher guidance. We are maintaining our 2020 estimate of $1.82. We summarize 2Q19 performance and management’s

On price/AFFO, the shares trade at 19.9-times our forward four-quarter estimate, toward the high end of the five-year historical range of 8.2-20.5 and near the peer median of 19.7. We believe that HCP deserves to trade at a higher multiple given its improved growth prospects.

The high dividend yield of about 4.2% may be attractive to income-oriented investors, especially given the potential for long-term low interest rates. HCP has raised the dividend at an average annual rate of 1.1%. Our dividend estimates are $1.48 per share for both 2019 and 2020.

We also expect HCP to benefit from favorable demographics, a generally high-quality real-estate portfolio, and a healthy balance sheet. Our target price of $39 implies a total return of 15%, including the dividend.

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