HCP ‘Making Massive Progress’ Reinventing its Senior Housing Portfolio

HCP, Inc. (NYSE: HCP) has set out to reinvent its senior housing portfolio, and company leaders believe that they are “making massive progress.”

The Irvine, California-based real estate investment trust (REIT) is currently “remaking [its senior housing portfolio] in a pretty dramatic way,” switching up the properties it owns, the providers it works with, the manner in which deals are structured and the way it aligns its incentives, Executive Vice President and Chief Investment Officer Scott Brinker said during a call with analysts and investors on Thursday.

“We’re still fairly early, but we like the direction that we’re moving,” Brinker added.


All the while, the REIT is making good on its promise to reduce its exposure to Brookdale Senior Living (NYSE: BKD) and has entered into relationships with some new providers in the process.

The REIT has been in a reinvention phase since spinning off its large, troubled portfolio of HCR ManorCare properties in 2017. After disposing of those post-acute and skilled nursing assets, HCP had to restructure its portfolio with an eye toward diversification, including reducing its Brookdale concentration.

RIDEA? Not so fast


Going forward, HCP still intends to build a portfolio that’s one-third senior housing, one-third life science and one-third medical office.

“We are focused on all three segments somewhat equally,” President and CEO Tom Herzog said during Thursday’s call.

In a move that sets it apart from competitor Welltower, Inc. (NYSE: WELL), HCP doesn’t seem to be keen to transition properties in its senior housing portfolio from triple-net leases to RIDEA, a trend KeyBanc Capital Markets Managing Director Jordan Sadler called “all the rage” on Thursday’s call.

“The triple-net portfolio for HCP is actually extremely high-quality … that’s true from a real estate standpoint, as well as operators,” Brinker explained.

One of HCP’s tenants—Dallas-based senior housing operator Capital Senior Living (NYSE: CSU)—indicated on Tuesday that it is in a “constructive dialogue” with its REIT landlords about the possibility of restructuring and equitizing its leases. On Thursday, Brinker indicated that such discussions may not actually lead to lease restructuring.

“We’re always willing to have discussions with our tenants … we like to have win-win relationships,” he said. Still, if current lease structures are beneficial to HCP, any alternatives would also need to be in the best interests of the REIT as well as its operating partners, he implied.

Brookdale transitions ‘100% on plan’

For several quarters, HCP has been looking reduce its exposure to the nation’s largest senior housing operator. As of the second quarter of this year, the REIT is “100% on plan,” Brinker said.

To date, HCP has completed 28 senior housing operator transitions from Brookdale Senior Living, including 20 to Atria Senior Living, five to Sunrise Senior Living, one to Sonata Senior Living and two to Elmcroft by Eclipse Senior Living (ESL), a new operator for HCP and a relatively new organization. Currently, occupancy at these former Brookdale communities stands at about 80%—which is down from 90%

“As expected, the transition period is choppy, occupancy is way down,” Brinker said.

The new operators are rebuilding the communities’ local reputations, but that will take some time, he noted. To recapture occupancy, HCP plans in part to renovate older properties so that they pass the “visual test” for potential residents.

Additionally, HCP entered into definitive agreements to sell 22 senior housing communities operated by Brookdale to an investment fund managed by affiliates of Apollo Global Management for $428 million. The deal is scheduled to close in two installments, with the first closing in the third quarter of this year and the second in the fourth quarter.

Beating analysts’ expectations

HCP’s second-quarter 2018 revenue of $469.55 million beat analysts’ expectations by $4.18 million. The company’s second-quarter 2018 FFO of 47 cents beat analysts’ expectations by 1 cent.

HCP had “a busy and productive few months” in the second quarter, but was forced “to navigate the headwinds in [the] senior housing business,” Herzog said on the call. Welltower and Ventas, Inc. (NYSE: VTR) both similarly noted in recent earnings calls that it’s a challenging operating environment.

As of market close on Thursday, HCP’s share price had risen 0.15% to $26.04.

Written by Mary Kate Nelson

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