HCP Charts Future Course for Senior Housing

After a period of turmoil with its largest tenant and shaky investor confidence, the leader of HCP Inc. (NYSE: HCP) says that the giant senior housing real estate company has righted the ship and is “sailing confidently.” But in what direction is CEO Lauralee Martin taking the company, exactly?

A high-profile addition to the C-Suite this week, as well as comments made by Martin to Senior Housing News, suggest that a key part of navigating out of murky waters will be an aggressive push to increase HCP’s private pay senior housing assets—perhaps by increasing its exposure to operation-driven upsides and risks.

Hutchens Joins the Crew

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CEO Justin Hutchens is leaving the top spot at Nashville-based National Health Investors (NYSE: NHI)—another prominent senior housing REIT—and joining the team at HCP, the companies announced earlier this week.

“As chief investment officer for senior housing and care, his priority will be going out into the marketplace with the operators and making accretive investments,” Martin told SHN Tuesday.

That might sound like a basic job description for the position, but Martin unpacked that statement to reveal more about why Hutchens was tapped for this job and how he is likely to impact HCP’s larger investment strategy.

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First, his job title is noteworthy. Hutchens’ sole focus will be the senior housing and care portion of HCP’s portfolio. This is a major slice of HCP—more than 65% of total assets, Martin said—but it is not the whole pie. HCP also is invested in post-acute care, life science and medical office buildings, and it has an international portfolio of health care properties in the United Kingdom and Mexico.

A varied portfolio like HCP’s requires “diversified talent” to achieve growth, and substantial growth of the senior housing portfolio is indeed a goal, Martin emphasized. Having someone on board to drive that growth, without having to concern himself with other parts of HCP’s business, is part of the calculus behind the Hutchens hire.

In addition, Hutchens’ experience is a major plus, according to Martin. He has a strong background in senior housing operations, having been executive vice president and COO of Emeritus Senior Living prior to joining NHI in 2009. This should enable him to be particularly effective in those talks with operators out in the marketplace, HCP believes.

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“With that balance of both investment and operating background, I think Justin will help us make better investments in the future, better manage those portfolios in the future, and give us real credibility with the operators when they think about who they want as a capital source,” Martin said.

Changes sweeping the health care landscape are bringing operational considerations to the fore in seniors housing, she noted. For instance, senior living operators have diversified or repositioned the services they offer as health care reforms are rewarding a coordinated continuum of care, leading some providers to go from strictly assisted living to adding memory care and ancillary services.

Of course, the idea that Hutchens would bring operational savvy to HCP raises the question of whether the REIT is interested in growing through more RIDEA-structured deals.

HCP already is engaged in a large-scale RIDEA joint venture with Brookdale Senior Living (NYSE: BKD) on a continuing care retirement community portfolio.

In the second quarter of 2015, the REIT closed on an $847 million acquisition of a portfolio from Chartwell Retirement Residences, operated by Brookdale. This expanded the HCP-Brookdale 90:10 RIDEA joint venture begun in 2014; just days before the Hutchens announcement, analysts on a second quarter earnings call pressed Martin on whether HCP would be increasingly open to these types of RIDEA arrangements.

“Everything is a risk-adjusted investment decision and we’ll continue to make those,” Martin said in reply. “There is a market preference by operators to have RIDEA, so we are very conscious of that. And that becomes important when we pick who we want to do business with.”

Martin also stressed operators’ preference for this structure to SHN, while saying that HCP is not necessarily targeting these types of ventures.

She underscored that an important priority would be attracting the best operators going forward, and that Hutchens’ expertise should be an advantage in doing so.

Steering Toward Smoother Waters

HCP has not had a stellar year: Its shares were down 14% year-to-date as of June. This downward trend is not unique to HCP; its peers Ventas Inc. (NYSE: VTR) and Health Care REIT (NYSE: HCN) also have seen a slide. This is likely due in part to the threat of an imminent interest rate hike, as Crain’s and other sources have pointed out.

However, the performance of the stock has added to other disturbances as HCP has been trying to steady itself in recent years. The turbulence included the 2013 C-Suite overhaul that put Martin into the CEO role, after the board decided a change in leadership style was needed and ushered out then-Chairman, President and CEO Jay Flaherty III.

Since taking the helm, Martin has had to contend with a beleaguered tenant in HCR ManorCare, a major post-acute and skilled nursing provider that also is HCP’s largest single client, representing roughly a quarter of revenues in 2014.

Earlier this year, HCP disclosed that the U.S. Department of Justice is investigating whistleblower claims that ManorCare has perpetrated Medicare fraud. That compounded preexisting investor concerns about the quality of ManorCare’s operations and the overall performance of the company.

HCP has responded in several ways, including by granting ManorCare $68 million in rent relief and agreeing to market 50 nonstrategic assets. That has proceeded smoothly, Martin told SHN.

In fact, HCP already has obtained letters of intent for 46 of the 50 properties, and expects proceeds of between $300 million and $350 million from the sale, which is at the higher range of what they anticipated.

“We continue to manage that to a more optimal position,” she said of the HCR ManorCare exposure.

HCP’s goal to grow its already expansive senior housing portfolio might not need much explanation, given such factors as the hugely favorable demographics driving demand in this sector. But the ManorCare woes put the move to grow the private-pay portfolio in a certain light.

Indeed, the REIT appears to be picking up speed as it tries to reach calmer waters: Even as it is shedding the ManorCare assets, it has completed $1.9 billion in investments year-to-date, headlined by the Chartwell closing. The investments made this year already match the total dollar amount of investments reached over the entirety of 2014.

And recent results give some indication that Martin and her team have charted a smart course. Adjusted funds from operations for the second quarter was at $0.79 per share, for a 5% year-over-year growth rate.

“We’re very pleased we announced what we think were very strong earnings and upped our guidance,” Martin told SHN. “The momentum is turning in the right direction.”

Written by Tim Mullaney

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