HCP Pained by ‘Distractions’ and Occupancy Trouble at Brookdale

Health care real estate investment trust (REIT) HCP Inc. (NYSE: HCP) was weighed down last quarter by trouble and confusion at the nation’s largest senior living provider.

In response, the Irvine, California-based company intends to continue reducing its exposure to Brookdale Senior Living (NYSE: BKD)—and the fate of the provider remains very much in the air.

Brookdale ‘distractions’


HCP’s second-quarter 2017 revenue of $458.93 million beat analysts’ expectations by $4.77 million; the company’s second-quarter FFO of 48 cents beat analysts’ expectations by 1 cent.

Still, the REIT’s senior housing operating portfolio didn’t fare as well as it had planned—and ongoing turbulence at Brookdale is partly to blame.

“Our Brookdale occupancy fell more than we had expected,” HCP CEO Thomas Herzog noted during the company’s earnings call on Tuesday. HCP has been working with Brookdale leadership to determine the root causes of this surprising decline—though Herzog believes that the problem has been “exacerbated by distractions” at the Brentwood, Tennessee-based senior living provider.


“[Brookdale] has been in the middle of a process that’s widely known as they consider their strategic alternatives, and with that, there’s obviously some distraction that can occur,” Herzog said.

Additionally, HCP has been negatively impacted by an above-average number of sales director turnovers at Brookdale communities. For this reason and others, HCP believes that Brookdale will suffer in terms of occupancy this year more than the provider is currently letting on.

“It’s possible that we’re being a bit conservative, but we felt it appropriate to guide down in the occupancy further than what their projections are,” Herzog said.

HCP still intends to reduce its concentration of Brookdale properties to 20% or less. There are a variety of groups interested in buying Brookdale properties from HCP and include private equity and operators.

“There’s a lot of money out there interested in transactions,” Herzog added.

The REIT has already agreed to sell five Brookdale properties by the end of 2017.

“We are under contract to sell five [Brookdale] assets for $35 million this year,” Herzog said, adding that those five assets will be sold for a mid-6 cap rate.

As for Brookdale’s future, he declined to speculate in detail.

“It could go a number of different directions,” he said. “I will tell you that regardless of which direction it goes, we will be proactively working to improve our postition over time.”

As of market close on Tuesday, HCP’s share price had fallen 4.42% to $40.25. Brookdale’s share price had fallen 8.66% to $12.97.

Hit by headwinds

HCP’s senior housing business was “negatively impacted by industry headwinds” in the second quarter of this year, Peter Scott, HCP’s executive vice president and CFO, explained during the earnings call.

The REIT’s SHOP portfolio recorded strong rate growth, for instance, but also was hit by above-average expense growth and a year-over-year decline in occupancy.

Plus, HCP’s SHOP cash NOI growth declined by 0.5% in its independent living and assisted living portfolio, and by 9.1% in its continuing care retirement community (CCRC) joint venture portfolio.

These struggles likely won’t lead to HCP abandoning CCRCs entirely, though.

“I don’t think the $500,000 decline year-over-year is making us say, ‘Oh my gosh, we need to get out of these assets’ right now,” Scott said.

Six of HCP’s assets are performing especially poorly in terms of occupancy, the company noted. Across these half-dozen assets—located in Rhode Island, Chicago, Miami and Sarasota, Florida—occupancy declined an average of 11%. This can be traced back to new supply and sales director turnover, according to HCP.

Welltower v. Brinker

HCP’s decision to hire former Welltower (NYSE: HCN) Chief Investment Officer Scott Brinker effective next January—and the resulting lawsuit alleging that Brinker broke non-compete agreements—also came up during the earnings call, with HCP insisting that the risk of hiring Brinker was worth it because he is “such a special talent.”

“Although we are not a party [in the lawsuit], we’re certainly very much involved… as the employer-to-be,” HCP Executive Chairman Michael McKee said on the call.

While the lawsuit brought by Brinker’s former employer, real estate investment trust Welltower, could result in some immaterial costs to HCP, the REIT suggested that it believes it has covered all of its bases.

“When we extended an offer to him, we had done extensive diligence talking to people he used to work for, used to work with, people that knew him from the client and team side, just extensively did a review,” McKee explained, adding that HCP had counsel review Brinker’s noncompete agreements “very carefully, line by line.”

HCP still believes that Welltower’s lawsuit has no merit, McKee suggested.

“As far as we can tell, there’s no ‘there’ there,” McKee said.

Written by Mary Kate Nelson

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