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Tickers in this Article: HCP, ESC, BX, TRNO
Real estate investment trust (REIT) - HCP Inc. (HCP) reported fourth quarter 2012 adjusted FFO (funds from operations) per share of 72 cents, a penny ahead of the Zacks Consensus Estimate of 71 cents and a nickel above the prior-year quarter figure of 67 cents. The results were driven by better-than-expected growth in revenue.

For full year 2012, adjusted FFO came in at $2.78 per share, a cent above the Zacks Consensus Estimate of $2.77 per share and exceeded the prior-year figure of $2.69 per share.

Including non-recurring items, HCP's FFO stood at 71 cents per share, well ahead of 37 cents reported in the year-ago period. For full year 2012, FFO per share came in at $2.72 per share and surpassed the year-ago figure of $2.19 per share.

HCP reported total revenue of $508.5 million during the quarter, reflecting an increase of 11.0% from the year-ago period. Total revenue also exceeded the Zacks Consensus Estimate of $500.0 million. For full year 2012, total revenue stood at $1.9 billion, up 11.0% year over year and marginally ahead of the Zacks Consensus Estimate of $1.89 billion.

Adjusted same-property net operating income (NOI) of the company reached $363.9 million in the quarter, 4.3% ahead of $348.8 million reported in the year-ago period. For full year 2012, adjusted same-property NOI also increased 4.2% from a year ago to $883.7 million.

Senior Housing Portfolio acquisition

During the reported quarter, HCP acquired 129 senior housing communities for $1.7 billion .The properties were purchased from a joint venture between Emeritus Corp. (ESC) and an affiliate company of The Blackstone Group LP (BX). Of the 129 communities, 95 were stabilized and 34 were in lease-up.

Spread across a wide geographical area spanning 29 states, the acquired portfolio includes a diversified mix of healthcare facilities totaling 10,077 units. By segment, the properties comprise a mix of 61% for assisted living, 25% for independent living, 13% for memory care and 1% for skilled nursing. Furthermore, the company is assessing the acquisition of up to 4 additional communities related to this transaction.

Emeritus entered into a new triple-net, master lease for the 129 properties. The Master Lease offers aggregate contractual rent in the first year, which reflects a 6.1% lease yield. In accordance with the acquisition, Emeritus purchased 9 communities from the Blackstone JV, for a secured debt financing of $52 million.

Other Investments during 4Q

During the quarter, HCP made investments of $141 million. This included $62 million for purchasing two MOBs (medical office buildings) of its prior announced Boyer MOB acquisition and $79 million to finance development and other capital projects, mainly in its life science, medical office and senior housing segments.

Moreover, the company sold two senior housing facilities for $111 million, a parcel of land in its life science segment for $18 million, and a skilled nursing facility for $15 million. HCP also received $38 million in principal payments from its senior secured loan to Delphis.

Liquidity

At the end of the quarter, HCP had cash and cash equivalents of $247.7 million.

In an effort to finance the $1.7 billion Senior Housing Portfolio acquisition, the company completed an equity offering of 22 million shares and generated proceeds of $979 million during the reported quarter.

Moreover, during the quarter, the company issued $800 million of 2.625% senior unsecured notes scheduled to mature in 2020. The transaction generated net proceeds of approximately $792.8 million. The company expects to use a part of the proceeds to repay its notes that mature in Feb 2013.

Outlook

For full-year 2013, HCP expects FFO of $2.92 - $2.98 per share, excluding the impact of any future acquisitions.

Dividend Update

On Jan 24, 2013, HCP announced a 5% hike in its quarterly cash dividend rate. The company will now pay a dividend of 52.5 cents per share compared with 50 cents paid in the prior quarter. The increased dividend will be paid on Feb 19, 2013 to stockholders of record on Feb 4.

In Conclusion

We are encouraged with the better-than-expected performance of HCP. This REIT has one of the most diversified portfolios in the healthcare sector and exposure to all types of facilities. Moreover, the Senior Housing portfolio closure during the fourth quarter boosted the company's portfolio diversification activity. The healthcare sector provides a steady source of income that insulates the company from short-term market volatility. Also, the recent dividend hike boosts investors' confidence on the stock.

HCP currently retains a Zacks Rank #2 (Buy). Another REIT stock that is performing better and is worth a look is Terreno Realty Corp. (TRNO), carrying a Zacks Rank #1 (Strong Buy).

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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