HCP Inc is a US$11.82b large-cap, real estate investment trust (REIT) based in Irvine, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how HCP’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess HCP.See our latest analysis for HCP
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of HCP’s daily operations. For HCP, its FFO of US$847.04m makes up 82.22% of its gross profit, which means the majority of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for HCP to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 10.75%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take HCP 9.31 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
Next, interest coverage ratio shows how many times HCP’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 2.75x, HCP is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing HCP, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In HCP’s case its P/FFO is 13.96x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
As a REIT, HCP offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in HCP, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for HCP’s future growth? Take a look at our free research report of analyst consensus for HCP’s outlook.
- Valuation: What is HCP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HCP is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.