HCP Makes Big Moves to Regain Senior Housing Swagger

By spinning off troubled skilled nursing assets, HCP Inc. (NYSE: HCP) leaders said the company can dedicate more time and attention to its senior housing business—and the major real estate investment trust is wasting no time in making moves on this front.

Specifically, the Irvine, California-based company has brought on board the former CEO of the nation’s largest independent living provider, has established relationships with a handful of new regional and national operators, and has sold half of its 80% ownership stake in a RIDEA venture with industry behemoth Brookdale Senior Living (NYSE: BKD). That transaction is expected to result in $740 million of proceeds through the sale and anticipated placement of third-party mortgage debt on the portfolio.

“Senior housing will continue to be a core focus for HCP, as evidened by $1.7 billion in investments made since the beginning of 2015,” CEO Lauralee Martin said Monday, on a conference call with analysts focused on the company’s first-quarter 2016 earnings, the newly announced spin-off, and its bevy of recent senior housing-related moves.

A stacked lineup of leaders

Kai Hsaio unexpectedly stepped down as CEO of Holiday Retirement in January, after seven years with the Lake Oswego, Oregon-based company that operates more than 300 communities nationally. That makes it the second-largest senior living provider overall and the largest independent living operator.

Now, Hsaio has joined HCP—one of the “Big 3” health care REITs—as executive vice president of senior housing asset management. Along with several other changes to its executive leadership, HCP announced Hsaio’s appointment Monday. Among the other changes, Justin Hutchens has been promoted to CIO. Hutchens previously was HCP’s chief investment officer for senior housing and care, a position he took after resigning as CEO of Tennessee-based REIT National Health Investors (NYSE: NHI) in August.

The former Holiday leader brings a wealth of operational expertise to HCP, Hutchens said on Monday’s call.

“He’s literally been in the shoes of our customers,” Hutchens said of Hsaio, noting that the two have known each other for years.

With HCP, Hsaio will be responsible for overseeing how the senior housing portfolio performs, with particular emphasis on creating value through business analytics, market analysis, financial oversight, and asset repositioning, Hutchens said.

“I’m confident that Kai’s operating expertise, combined with investment savvy of [Executive Vice President, Senior Housing and Care] Kendall Young, will accelerate our senior housing platform for success,” Hutchens said.

With Hutchens and Hsaio both being former high-profile CEOs, HCP now has a stacked lineup of executives overseeing its senior housing assets—and equity analysts were probing the implications of this on Monday’s call.

“The board is very confident in the ability of this team to work closely and well together, which is important to us,” said Michael McKee, whose appointment as executive chairman of the board also was announced Monday.

Perhaps adding some fuel to speculation that Hsaio and Hutchens may both be candidates to eventually succeed Martin as CEO, McKee said the board is interested in having a successor “or two” for each of the key positions at the company.

RIDEA revamp

In two massive transactions, HCP in 2014 and 2015 forged RIDEA joint ventures with Brookdale, the largest senior living company in the nation. Now, as part of the company’s efforts to balance its senior housing portfolio and recycle capital, HCP has sold half of its ownership in the first of these ventures (known as RIDEA II).

The buyer is an investor group led by Columbia Pacific Advisors, the Seattle-based firm founded by Daniel R. Baty, who also was behind the formation of assisted living pioneer Emeritus Corp. Under the new structure, ownership will be divided roughly 40/40/20 among HCP, Columbia Pacific, and Brookdale, respectively.

“The beauty of the RIDEA II [transaction] is we remain an owner in all 49 assets … we’ll just own less of it,” Hutchens told analysts. “Perhaps in time we’ll be interested in buying the assets back, I wouldn’t rule that out.”

In the meantime, HCP not only will receive the proceeds of the sale and the placement of third-party mortgage debt, but it will help reduce HCP’s exposure to Brookdale, which represents about a third of the HCP portfolio after the spin-off of skilled nursing assets.

While having a diverse tenant base is a priority for HCP, backing off the RIDEA venture—as well as the fact that HCP is in “advanced talks” to sell 25 Brookdale properties deemed non-strategic—should not be taken as a sign that the relationship between the REIT and the operator is shaky, Hutchens emphasized.

“We have a great, very fluid dialogue with Brookdale and creating value with that portfolio,” he said. “The overriding message is we like the relationship.”

The RIDEA II sale is expected to be finalized this year.

Diversified growth

Reducing its Brookdale concentration is only one part of HCP’s strategy for diversifying its senior housing portfolio—bringing in new operating partners is another approach, and headway already is being made, Hutchens said.

In the first quarter of 2016, HCP entered into a definitive agreement to acquire seven senior housing communities for $190 million, which will be operated by Chicago-based Senior Lifestyle Corporation in a 100% RIDEA structure. This marks the first time that HCP has partnered with Senior Lifestyle, which operates nearly 180 communities.

Four other new operating partners, one national in scope and three regional, were brought on board through the acquisition of six triple-net leased properties in the first quarter, including five private pay senior housing communities and one skilled nursing facility.

Without the overhang caused by the skilled nursing portfolio, and with leaders in place who have deep relationships to cultivate in the industry, further growth and diversification can be expected for HCP on the senior housing side, executives said.

“We expect that HCP is going to have a very strong growth profile,” said McKee. “Some of the relationships we have that we want to exploit are going to be at our front door now. We need to be really excited about what’s going to happen to HCP.”

Written by Tim Mullaney