CEO: Spinoff on Track to Reveal the ‘Real’ HCP

HCP Inc.’s (NYSE: HCP) recently announced spinoff of its struggling skilled nursing assets into an independent, publicly-traded real estate investment trust (REIT) is going as planned to unleash HCP’s ‘real’ value, according to CEO Lauralee Martin.

“We are on track with that [spinoff],” Martin said during a presentation at National Association of Real Estate Investment Trusts’ (NAREIT) REITWeek. “All is going as scheduled.”

The spinoff will move HCP’s skilled nursing assets with its tenant HCR ManorCare into a separate entity and may give HCP, one of the “Big Three” health care REITs, the opportunity to recapture its stock value. Compared to its peers Ventas Inc. (NYSE: VTR) and Welltower Inc. (NYSE: HCN), HCP has seen its share prices slide over the last year, largely due to the drag from its skilled nursing woes with HCR ManorCare, one of the nation’s largest skilled nursing operators.

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“The most exciting part of that is that we now take that overhang that’s been on the company for a period of time that doesn’t allow the real HCP, 75% of our portfolio—the non-HCR ManorCare portion of it—to show and shine in terms of the quality…” Martin said.

Changes in reimbursement rates for ManorCare’s services have resulted in occupancy struggles, Martin noted. However, HCP’s lease with ManorCare also has value that is unable to be captured in its current structure under HCP’s ownership. By spinning off the assets instead of selling them, the portfolio will likely be able to regain some of that value, according to Martin.

“The motivation is clearly to get the most out of that ManorCare investment by putting it into an entity that is structured appropriately, capitalized appropriately and gives the message to its shareholders that that is [the spinoff’s] purpose—to maximize its value to shareholders—that it can work that portfolio better than we can at HCP and will have more tools to do that,” Martin said.

The company also shared some details in the presentation about its next steps, such as filing a form 10 with the Securities and Exchange Commission (SEC), obtain new financing for the SpinCo and execute a HCP financing plan. The company is also currently underway with setting up a new management team that will be led by Mark Ordan, former CEO of Sunrise Senior Living. The management team will be “elaborated on” when HCP files its form 10 for the new REIT.

Once the spinoff is completed as expected by the end of the year, HCP will be able to deliver consistent growth from the majority of its current assets, Martin said.

“We can go back to being focused on three businesses—our senior housing, our medical office portfolio and our life science business—where the demographics are good, our positions for growth are good [and] our relationships are extraordinarily strong,” Martin said.

Post spinoff, senior housing will make up roughly 50% of HCP’s overall portfolio, according to Martin. On the senior housing side, Martin was cautious about oversupply, but remained largely unconcerned as a result of the strength of the portfolio and HCP’s pricing strategy to “work” the portfolio.

“There is no question that there are some markets where supply has grown faster than the demographic needs,” Martin said. “Our strategy against that is we believe that you really need to work your portfolio and work those markets. You can’t just take a comment on supply. You need to understand each of of your assets and how supply is going to compete with it. Supply is something no one should take lightly, but it becomes an opportunity if you manage your portfolio better than the market.”

Written by Amy Baxter

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