After 2 Years of Defense, HCP Is ‘Back To Playing Offense’ [UPDATED]

After a two year flurry of activity in which the REIT shed itself of poor-performing assets, reduced its exposure to Brookdale-operated properties and retooled its executive leadership, HCP (NYSE: HCP) announced it is ready for the future.

“We have remade the company and we’re back to playing offense,” HCP President and CEO Tom Herzog said during a presentation at the Bank of America Merrill Lynch 2018 Global Real Estate Conference in New York City on Wednesday.

A balanced portfolio

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HCP — an Irvine, California-based real estate investment trust (REIT) — has now achieved its goal of diversifying its portfolio between senior housing, medical office and life sciences.

HCP Investor Presentation
HCP has streamlined its portfolio over the past two years to a balance of senior housing, medical office and life sciences.

More important, HCP significantly reduced its exposure to Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) assets, from 34% to 21%, and is on pace to reach a target pro forma of 16%. HCP expects to complete a $378 million sale of 19 third-party Brookdale assets next month, and transitioned 24 communities to Louisville-based Atria Senior Living this year.

The Brookdale deal, with Apollo Global Management, was originally announced for $428 million in June. HCP later held on to three assets valued at $50 million, which it will look to sell and transition.

“We’re about 90% completed with transitions,” HCP Chief Investment Officer Scott Brinker said.

With its exposure to Brookdale reduced, HCP saw occupancy rates improve in Q3 after over a year of decline. While part of that turnaround may be attributed to seasonality, the REIT is pleased that it turned a corner here.

“Because the way the business works, the simple math is it’s probably a full year from now until we have a realistic chance of reporting year-over-year growth rates,” Brinker said. “Because occupancy fell so far, it will take some time for revenue to catch up.”

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HCP reported higher than normal senior housing expenses in Q3, a one-time occurrence due to renovations, repairs and maintenance, contract and labor retention related to bringing in new operators. That should not continue into 2019, Brinker said.

While senior housing accounts for most of HCP’s portfolio, the transitions account for a small amount of quarterly revenue, compared to the very bullish medical office and life sciences concerns.

“Those transitions amount only $6 [million] to $7 million per quarter for a company that generates well over $1 billion in NOI,” Brinker said. “In terms of impacting the actual earnings profile of the company, it’s quite modest.”

Looking toward 2020 and beyond

With the senior housing portfolio stabilized, HCP expects 2019 to set the table to sustainable growth in 2020 and 2021. Supply continues to outpace demand, which is an industry-wide problem. But the transitions adversely impacted the REIT this year. HCP’s transition portfolio occupancy sits at 80%, while the industry average is closer to 90%. The entire senior housing portfolio sits at 85% occupancy.

But HCP has reduced its risk exposure moving forward. More than half of its portfolio is locked into triple-net leases, and Herzog. He expects the demand-supply equation to return to equilibrium, setting the company up to capture value, beginning in 2020.

“As we get into 2020 and 2021 we won’t have those roll-downs and we’ll get back to more normal growth, as would be expected,” Herzog said.

Written by Chuck Sudo

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