Ongoing troubles for HCP Inc. (NYSE: HCP) may have reached a critical level, making the major owner of senior housing real estate a prime takeout target—with rival Ventas Inc. (NYSE: VTR) perhaps being the most likely buyer.
At least, that’s a scenario some analysts are presenting as a possible outcome for the Big Three REIT.
“Three years ago HCP was considered a ‘blue-chip’ REIT,” write Kevin Tyler and Andrew Suh, analysts with Green Street Advisors. “Recent write-downs of its large HCR ManorCare skilled nursing investment, troubles in the UK, late-to-the-game and capex-heavy RIDEA bets, and management turnover have led to a fall from grace.”
Investors have long been wary of the situation with Toledo, Ohio-based HCR ManorCare, one the nation’s largest skilled nursing operators and a major tenant of HCP since a blockbuster $6.1 billion deal closed in 2011. Lately, however, ManorCare has struggled on multiple fronts. A challenging Medicare reimbursement environment, an ongoing federal probe of its billing practices, and other woes contributed to worse than expected results in the fourth quarter of 2015. HCP subsequently announced it would undertake a strategic review, and its stock took a serious hit.
The widening valuation gap between HCP and its peers—coupled with executive turnover and other factors at the Irvine, California-based REIT—prompted Green Street to try to “connect the dots,” Tyler tells Senior Housing News.
First, HCP’s options to right the ship appear to be narrowing, with a sale of ManorCare looking unlikely, Tyler and Suh determined.
Yet, HCP still has a portfolio that could attract interest from buyers—notably Chicago-based Ventas and “Big 3” peer Welltower (NYSE: HCN). Indeed, the likelihood of an HCP sale is now 30%, up from 10%, in Green Street’s estimation.
“We think of that over an 18-month timeframe,” Tyler says.
None of the companies analyzed in the report contributed to it or commented to Green Street, he emphasizes. Ventas and Welltower also declined to comment to Senior Housing News. HCP had not responded to requests for comment from SHN as of press time.
“We’re simply saying here are the pieces, and investors can put together the puzzle,” Tyler says.
Solving the ManorCare puzzle
Ventas makes sense as a buyer both for financial and strategic reasons, the argument goes.
Strategically, HCP’s high-quality medical office and hospital assets fit into Ventas’ portfolio, while the troubled ManorCare assets would be a relatively small sliver of the overall pie, the report states. Ventas might also be able to offload some regional skilled nursing properties to Care Capital Properties—the pure-play skilled nursing REIT spun off from Ventas last year.
As for the major skilled nursing piece—ManorCare—this might be an opportunity for Ventas CEO Debra Cafaro to demonstrate her dealmaking prowess, says Tyler.
ManorCare might hold some allure for private equity, the report suggests, but resolving the situation might demand more creative alternatives; exploring the options would certainly appeal to Cafaro’s penchant for problem solving, the Green Street report notes, citing recent comments she made to SHN.
“Ventas has a great track record of doing great deals, and creative ones in the skilled nursing space,” Tyler says. “That’s how Debbie’s built her business.”
The $60 billion question
In terms of the remainder of HCP’s portfolio, Ventas might be able to sell life science assets to an entity such as Blackstone, according to Tyler and Suh.
Alternately, Ventas might hold onto the life science assets. “[Cafaro] has expressed interest in life sciences over the years,” Tyler says. “This is a high quality one she might consider.”
From a senior housing perspective, the deal might help diversify Ventas’ private pay portfolio and reduce its exposure to potential oversupply, Tyler tells SHN.
A notable proportion of the senior living assets would be properties operated by Brookdale Senior Living (NYSE: BKD), the nation’s largest provider, which has seen its own share of trouble recently as it struggles to integrate former rival Emeritus Corp. But Ventas will be intimately familiar with Brookdale, Tyler says, and he does not believe that company’s issues would preclude an HCP acquisition.
“I think [Ventas] could get comfortable underwriting [the Brookdale properties] at a discounted price, and there are some high-quality assets in that portfolio, to be sure,” he says. Brookdale also has expressed interest in remaining a significant property owner, he adds, so the Brentwood, Tennessee-based company might consider buying back some of this real estate.
In terms of financial considerations, deal synergies could result in G&A savings and reduce borrowing costs for Ventas. The million—or billion—dollar question might be how the market views Ventas’ ability to manage the portfolio versus HCP.
Ventas might be able to pay $40 per share—which should be an attractive premium for HCP—if the determination is that the HCP assets are worth 10% more in Ventas’ hands, the report proposes.
The result for Ventas would be a portfolio that maintains its balance, while the REIT itself would become even more of a power player than it is currently. The gross asset value for VTR after the combination would approach $60 billion, making it one of the largest REITs overall and maybe the most dominant health care REIT.
The case for Welltower
If Ventas doesn’t bite, perhaps the other of the so-called “Big 3” REITs will.
The acquisition doesn’t fit Welltower (NYSE: HCN) as nicely as Ventas, according to Tyler and Suh. Welltower has steered clear of hospital investments and labs, as well as older senior housing properties in the U.K. that are now part of HCP’s portfolio. The domestic Brookdale properties also are an awkward match, because BKD is a huge national provider and Welltower is more tightly focused on high-barrier-to-entry markets, the report states.
However, there are other potential considerations, such as simply doing a great deal with favorable pricing, Tyler and Suh point out. And as it would for Ventas, an HCP acquisition would make Welltower even more massive, to the tune of a $67 billion portfolio.
Of course, whether either of these scenarios will come to pass, only time will tell.
“We’re not saying anything is going to happen or is likely to happen,” Tyler says. “But [we think] it’s more likely today than a few months back.”
Written by Tim Mullaney
Photo credit: Emilio Küffer