HCP Unveils 5-Step Plan to Transform Senior Housing Portfolio

HCP, Inc. (NYSE: HCP) is hoping to get away from the “noise of repositioning” and finally start transforming. Addressing its senior housing portfolio is one key part of achieving this transformation, and leaders with the Irvine, California-based health care real estate investment trust (REIT) laid out their plans Thursday, in conjunction with announcing first-quarter 2018 earnings.

One major facet of the senior housing transformation will be a concerted move away from triple-net leases. In fact, though the REIT has “historically [been] more of a passive, triple-net [senior housing] landlord,” HCP is on track to become “a best-in-class real estate operating company,” Scott Brinker, HCP’s executive vice president and chief investment officer, said Thursday during a call with investors and analysts.

Triple-net lease structures made sense a decade ago—but not in today’s senior housing environment, Brinker explained.


“You haven’t seen us do a triple-net lease in probably 10 years, and I don’t think it’s likely that you’ll see us doing one going forward,” he said.

Other senior housing owners, including HCP rival Welltower (NYSE: WELL), have also shifted more to RIDEA structures in recent months. It’s a trend that analysts with Green Street Advisors predicted last year, citing better alignment between operators and landlords, among other benefits. Green Street still stands by the predictions it made in that report, analyst Andrew Suh recently told Senior Housing News.

Converting select, high-quality triple-net senior housing portfolios with strong growth potential into senior housing operating portfolio (SHOP) assets is just one of the five senior housing-related initiatives HCP laid out on Thursday.


Additionally, HCP ultimately hopes to diversify its portfolio so that it is one-third medical office, one-third life science and one-third senior housing.

“We still like the [senior housing] business, we still believe in it in the long term,” HCP President and CEO Thomas Herzog said on the call.

“Our goal as a company is to create a more even balance,” he added.

Senior housing initiatives

In addition to converting some triple-net assets into SHOP, HCP’s senior housing initiatives include:

  • Selling certain assets and transitioning others to new operating partners
  • Redeveloping certain older physical plants that are in “tremendous locations”
  • New development, “smart” acquisitions and new operator relationships
  • Establishing a superior asset management platform led by data, analytics and relationships

These initiatives are doable, but the senior housing market is experiencing challenges ranging from record-low occupancy to new supply, even in high-barrier-to-entry markets, Brinker noted.

“Cycles aren’t new to the sector,” he explained. “Today, the environment is difficult, and it likely will remain so for the next few years.”

New supply has taken a toll on HCP’s earnings. The REIT’s first-quarter 2018 revenue of $479.2 million, for instance, was down 2.6% year-over-year.

“There needs to be a more significant and sustained slowdown in new starts before we would feel confident about the sector returning to strong growth in earnings,” Brinker said.

In the meantime, HCP is considering which of its triple-net assets are the best candidates to join its SHOP portfolio.

“HCP has some very high-quality real estate inside the triple-net portfolio and some very high-quality operating partners—Sunrise [Senior Living], Aegis [Living], Oakmont [Senior Living]—in triple-net, and those could very well be opportunities for SHOP,” Brinker said.

Overall, HCP’s first-quarter 2018 revenue of $479.2 million beat analysts’ expectations by $15.93 million. The REIT’s first-quarter FFO of 48 cents beat analysts’ expectations by 2 cents.

As of market close on Thursday, HCP’s share price had risen 9 cents to $23.53.

More Brookdale transitions in store

HCP’s senior housing portfolio mix is destined to change in another regard as well, as the REIT has been seeking for several quarters to reduce its exposure to Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD). The nation’s largest senior living operator is in the midst of trying to execute a turnaround, under a new CEO.

In the first quarter, HCP completed the $275 million sale of six properties to Brookdale. Additionally, the REIT announced an agreement in March to transition management of two dozen senior housing communities owned by HCP from Brookdale to Atria Senior Living. HCP also transitioned one community to Orlando, Florida-based operator Sonata Senior Living.

HCP is currently finalizing agreements with different operators to transition more Brookdale managed communities and expects to complete these transitions this year.

“We’re talking to a number of parties about the assets, [and] our preference is to do something in scale but we’re open minded to alternatives,” Brinker said. “Parties would have the ability to bring in their own operating partner here.”

UK exit

This month, HCP entered into definitive agreements with an institutional investor to establish a joint venture through which it will sell a 51% interest in its holdings in the United Kingdom, based on a total portfolio value of £394 million, or approximately $536 million.

As part of the deal, HCP can eventually sell its remaining 49% stake in the joint venture to the aforementioned institutional investor.

HCP expects the deal to close sometime this summer, and its complete exit from the UK to take place no later than 2020.

“This is really a full exit, it’s just going to happen in stages,” Brinker explained.

Written by Mary Kate Nelson

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