While real estate investment trusts haven’t typically invested too much into continuing care retirement communities, HCP says it’s been looking into the sector for years, and the recent joint venture with Brookdale came at the right time.
“We’ve looked at the asset class for several years,” said Paul Gallagher, chief investment officer and executive vice president of HCP during the first quarter earnings call. “Prior to 2008, valuations were rather lofty cap rates for these assets. They typically traded at lower cap rates than traditional senior housing.”
The lion’s share of entrance fees were mostly refundable, if not 100% refundable, he said. “When the market took a downturn, we looked opportunistically to try and buy some of these assets. It was difficult to figure out where the bottom was in the housing market… and where entry fee prices would end up stabilizing at.”
In many cases, operators would end up with large amounts of refunds to pay out, but without a lot of new entrance fees coming in to offset the expenses, he continued. The biggest difference, he says: the housing market has recovered.
“Entry fees are less refundable today than where they were. They’re now probably about 50% nonrefundable,” Gallagher said. “They get you a much more durable cash flow stream.”
Additionally, the CCRCs in the joint venture with Brookdale have census that’s beneath the industry average, giving HCP a good entry point and more upside.
“We look at this as a good opportunity,” Gallagher said. “It’s outsize growth for a couple years, with occupancy going from 89% to 90%, and some to 95%. They will then stabilize out, but we look at this venture as the ability for us and Brookdale to work together to help consolidate the space.”
HCP is expecting NOI in the 6-8% range for the CCRC joint venture as occupancy increases, the chief investment officer said. The venture is expected to remain in its current ownership split with HCP owning 49% and Brookdale the remainder.
As for how large the joint venture portfolio could grow, that remains to be seen.
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“We don’t have a size limitation on it,” said Gallagher. “It’s whatever the opportunity brings.”
That opportunity could be significant. “Brookdale sees [CCRCs] as an industry that’s going to have tremendous consolidation over time,” HCP CEO Lauralee Martin said.
“We’ve had conversations with HCP about [the CCRC joint venture] opportunity for literally years,” Andy Smith, Brookdale CEO, told analysts during a first quarter earnings call. “We’ve been in conversation with them for a lengthy period of time.”
While Brookdale is the organization that approached HCP to initiate the transactions, it was “very collaborative,” he said. “We both really quickly realized there was an opportunity to do something that was good for both organizations.”
“In all our relationships, we go through and determine what we would like out of the relationship,” Gallagher said. “There was consent [with Brookdale]; we negotiated consent. They asked us if we’d entertain certain things. We pulled out our list, they pulled out their list, and we cut a deal that worked for everybody.”
Written by Alyssa Gerace