Having named both a new CEO and president this week, major senior housing owner HCP Inc. (NYSE: HCP) will be moving forward by pursuing a three-part strategy and a new approach to acquisitions.
The appointment of Tom Herzog as CEO and Justin Hutchens as president capped off a recent period of intense activity for the Irvine, California-based real estate investment trust (REIT).
As of Nov. 1, it completed the spin off of its troubled HCR ManorCare skilled nursing properties into a separate REIT. Shortly thereafter, it announced major transactions involving its primary senior housing tenant, Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD). The sale of Brookdale properties reduced HCP’s exposure to the nation’s largest senior housing provider, which has been struggling following the 2014 mega-acquisition of its rival Emeritus Corp.
These transactions were executed while HCP was led by interim CEO Mike McKee, the executive chairman who stepped in after Lauralee Martin left the CEO post in July. On Monday, the company filled that leadership vacuum with Herzog and Hutchens.
As president, Hutchens will take a lead role on transactions across the enterprise, will be in charge of HR, and will have a seat at the table with Herzog and McKee on corporate strategy. He will work closely with the leader of the senior housing business, former Holiday Retirement CEO Kai Hsaio, who will report to Hutchens.
The business leaders for medical office buildings and life sciences will report to Herzog, as will the company’s CFO, general counsel, and Hutchens.
With these major moves completed, “HCP 3.0”—as leadership has dubbed the transformed company—is ready to take shape, Herzog and Hutchens told Senior Housing News.
“Going forward, we’re going to provide a focused approach that continues to improve: 1) our portfolio; 2) balance sheet metrics; and 3) cash flows & dividends to our shareholders,” Herzog said. “We call these the three legs of the stool and will work to balance and improve each of these objectives over time.”
The approach to acquisitions is one of the most notable strategic shifts related to this plan. HCP will no longer be so focused on large transactions and portfolio acquisitions as in the past.
“Moving forward, we’ll be willing and interested in more targeted growth and underwriting local markets,” Hutchens said. “We’ll have transactions teams that are very focused on growth, and they’re going to be focused on meeting with senior housing operators, hospitals, health systems, to establish relationships and familiarity with their growth plans and business plans.”
Look for acquisition deal flow to be most active in medical office buildings and senior housing, he added. Life sciences is an area where more development capital is likely to be allocated.
With regard to senior housing specifically, HCP has two leaders with operations credibility in Hsiao and Hutchens, and they will be leveraging that. Deals are likely to expand the senior housing operating (SHOP) portfolio with more RIDEA structures, Hutchens said.
HCP not only believes it has the expertise to succeed in RIDEA deals, but likes the alignment it creates between operators and the REIT, Hutchens said. And he believes that markets are moving toward joint ventures and similar types of arrangements.
The market also has changed from the days when blockbuster acquisitions were the norm, and HCP’s new approach is in part responding to the current flow of smaller portfolios or tuck-in acquisitions.
But the REIT is also sensitive to the issue of oversupply, which reached a new level of urgency in recent third-quarter 2016 earnings calls.
“We’re going to be very strategic about the types of senior housing communities we pursue, whether it’s independent living, assisted living, or CCRCs, we’ll be focused on entering markets that are less impacted by new supply, with an aging demographic growth rate and affordability metrics that support those community types, and with an experienced operator,” Hutchens said. “It’s also important to note that not every market is impacted. Several markets are projected to see growth during the next year.”
Regardless of the acquisition size or asset type, one thing is definite, Herzog said: HCP is only going to grow when it can do so accretively to its net asset value.
While it remains to be seen how these plans play out, investors appear to be bullish on an HCP with Herzog and Hutchens leading the C-Suite. Share price increased from $27.98 early Monday to $29.64 following their appointment. HCP was down slightly on Wednesday, closing at $29.32 per share.
Written by Tim Mullaney