HCP Targets REIT Rebirth Following CEO Exit

As far as HCP Inc. (NYSE: HCP) is concerned, it is a Phoenix rising from the ashes. And following Monday’s news that the Irvine, California-based health care real estate investment trust (REIT) is moving on from former CEO Lauralee Martin, the company feels the time is right to introduce a new generation of leadership for a new generation of HCP.

“It’s a renaissance of historically one of the great companies in the real estate space,” Mike McKee, HCP’s executive chairman and interim CEO, told Senior Housing News of HCP’s leadership changes.

The REIT’s rebirth had been a long time coming, and has been spurred on by several other recent executive change-ups, made with the end-goal of once again becoming “a very formidable competitor” in the health care real estate space, McKee said.

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Simply, HCP’s new generation of leadership must also reflect the new generation of the 31-year-old company, McKee said.

“The hand that Lauralee had to play had a number of headwinds and a number of limitations,” McKee said. “We’re at a point now where we’ve decided and we’ve announced that it was time to move to the next generation of leaders.”

An expected move at an unexpected time

HCP’s CEO shakeup on Monday was simultaneously unsurprising and unexpected, as far as analysts are concerned.

In letting go of Martin, HCP was “proactively addressing a change that appeared inevitable,” Rich Anderson, an analyst with Mizuho Research, said in an analyst note. But while the change may have come sooner than expected, the move makes long-term sense, analysts agreed.

“There’ve been signs that this was coming,” Omotayo Tejumade Okusanya, an analyst with Jefferies LLC, told SHN. “I don’t think anyone will be surprised whatsoever at this announcement.”

Some facets of the executive change-up surprised analysts, however.

As part of her separation agreement, for instance, Martin is set to receive a salary continuation of $6 million over the next 24 months. That news was met with surprise from some analysts, who noted that Martin’s employment contract was set to expire in October.

“There’s a little bit of surprise that she’ll get this big of a severance package,” Okusanya said. “That raises some corporate governance issues.”

The fact of the matter is that Martin does have severance, as she is leaving the job in a friendly manner, McKee told SHN.

“What she’s getting is contractual, and so we’re honoring that, which we’re obligated to do,” he explained. “We’re treating her no differently than we would treat others.”

What’s next

HCP’s board will undergo a process to select the new permanent CEO over the next several months, McKee told SHN. HCP plans to primarily focus on internal candidates, but the board will not exclude external candidates.

“We will start with a focus on internal, but without in any way suggesting we won’t be open minded,” McKee said. “But we’re pretty pleased with the bench we have, and we don’t feel a need to cast a wide net.”

Ultimately, HCP is looking for candidates who are comfortable in the health care space, comfortable with real estate and comfortable with the aspects of running a public company—but who also have “the intangible leadership quality that pulls everything together,” McKee said.

McKee himself is not a candidate for HCP’s permanent CEO, Anderson wrote in his prepared statement. HCP does have two qualified candidates in CIO Justin Hutchens and CFO Tom Herzog, he noted, while still cautioning that any eventual decision could lead to unrest among remaining leadership.

“The problem is the ultimate decision on the new CEO (expected to take 3-6 months) could alienate the rest, and make it difficult to keep everyone happy and on board for the long haul,” Anderson said.

Announcing ‘Quality Care Properties’

As far as analysts are concerned, Martin’s ousting in and of itself won’t impact HCP as a company.

“Is this materially going to change HCP? I don’t think it’s meant to,” Okusanya told SHN. “Once the spin off is done, you’re still looking at a company that will have gotten rid of its biggest problems: ManorCare.”

HCP is about to launch a financing for the new spin-off, which it’s calling Quality Care Properties, McKee told SHN. Quality Care Properties is set to become an independent, publicly traded company in the next couple of months, and then the plan is to reintroduce the remainder of HCP as a stand-alone company, no longer burdened by the headwinds that the ManorCare portfolio has had over the last few years, McKee explained.

“The remaining assets of HCP in senior housing, medical office, hospitals and life science are as strong and good a portfolio as anyone in the country has,” McKee said.

Additionally, going forward, HCP will still be heavily weighted toward private pay senior housing, have fairly strong balance sheets, and have a major focus on growing its senior housing, medical office building and life science businesses, Anderson said.

“Furthermore, we do not believe investors should view this change as foreshadow of something else strategic (such as a sale of RemainCo), nor do we believe breaking up the company into even smaller pieces, is on the table,” he added.

McKee is nothing short of optimistic about HCP’s future.

“We’re going to be a very formidable competitor,” he said. “We anticipate being able to grow the company and compete strongly.”

Written by Mary Kate Nelson

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