HCP Bullish on Portfolio with New Operators, Less Brookdale

HCP, Inc. (NYSE: HCP) has come a long way from the company it was a few years ago.

“By all measures, 2017 was a pivotal year in our transformation of HCP,” Thomas Herzog, president and CEO of the Irvine, California-based real estate investment trust (REIT), said during the company’s fourth-quarter and full-year 2017 earnings call on Tuesday. “The heavy blasting of our repositioning is behind us.”

Once all of HCP’s repositioning initiatives—including its planned dispositions of several Brookdale Senior Living (NYSE: BKD) assets—are completed, the REIT will “own a vastly improved portfolio,” Herzog explained. And, going forward, HCP intends to invest between $400 million and $500 million per year in development and redevelopment projects. In one example of a high-profile project, the REIT is providing some financing for a Seattle high-rise involving other well-known industry players, Columbia Pacific Advisors and Leisure Care.


However, market pressures are coming to bear, including ongoing supply challenges, and the REIT reduced its guidance for 2018. As of market close on Tuesday, HCP’s share price had fallen 0.21% to $22.80.

Flu, new supply impacts

HCP’s fourth-quarter 2017 revenue of $443.3 million missed analysts’ expectations by about $5.4 million. The REIT’s fourth-quarter funds from operations of 48 cents, meanwhile, beat analysts’ expectations by 1 cent.


On the whole, HCP’s senior housing portfolio was negatively impacted by a severe flu season during the last three months of 2017, Executive Vice President and CFO Peter Scott said during the call.

As of Dec. 31, 2017, for instance, the REIT’s senior housing triple-net portfolio had an occupancy of 86.4%, which was down from 88% in the fourth quarter of 2016. The REIT’s SHOP portfolio, meanwhile, had an occupancy of 87% in the fourth quarter of 2017, down from 88.7% a year earlier.

The flu, notably, has not caused many residents to move out of HCP-owned senior housing properties; instead, it has prevented some communities’ occupancies from growing.

“We have not experienced significant move-outs, but we have been impacted by embargoes in certain assets, which has resulted in a reduction in move-ins,” Scott explained.

An influx of new supply in certain markets has also presented challenges for the REIT.

“We are in the midst of senior housing peak deliveries and expect that to persist through 2018,” Scott said.

Combined, all of these pressures—and others—have caused HCP to reevaluate its expectations for the upcoming year.

“We have a cautious view for our SHOP portfolio in 2018, given new supply headwinds, wage pressures, one of the toughest flu seasons in recent years” and operator transitions, Herzog said.

The harsher-than-usual flu season and new supply also negatively impacted Chicago-based Ventas (NYSE: VTR) last quarter.

New operating partners

HCP feels “very good” about the progress it has made disposing of Brookdale assets, Herzog said.

The REIT closed $1.6 billion worth of Brookdale dispositions in 2017, and it’s in the process of transitioning or selling 36 senior housing operating properties and 32 triple-net leased communities currently operated by Brookdale.

HCP also expects to close on both the acquisition of Brookdale’s 10% interest in the RIDEA I joint venture for $63 million and the sale of six assets to Brookdale for $275 million near the end of the first quarter of this year.

Still, HCP is staying mum on which operators will take over the Brookdale assets that it is transitioning.

“We don’t want to disclose the operators just yet, but they’re all well-known, high-quality operators and we think they’ll be ones that you like,” Kendall Young, HCP’s senior managing director-senior housing properties, said during the call.

The operators in question are “mainly existing operators,” he added.

The REIT has also been fairly busy with new developments lately, executives made clear.

For instance, HCP entered into a participating debt financing arrangement in December 2017 with Columbia Pacific Advisors to fund the construction of a high-rise senior housing development in downtown Seattle.

Specifically, the REIT is set to provide a participating development loan of up to $115 million for the $147 million, 243-unit senior housing development—620 Terry—which is anticipated to be completed in 2019 and operated by Leisure Care, LLC.

Additionally, in November, HCP purchased a 90-unit senior housing community in Watertown, Massachusetts, called The Residence at Watertown Square. The REIT owns the property in a consolidated joint venture with LCB Senior Living, LLC—an operator that HCP has been looking to partner with for some time, according to Scott. Norwood, Massachusetts-based LCB currently operates roughly 17 communities throughout New England.

“We are pleased to welcome LCB in our group of operators,” he said.

Written by Mary Kate Nelson

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