HCP’s Senior Housing Portfolio Prepared for 2019 Headwinds

On the heels of a reshaping of its senior housing portfolio taking place over the course of the last two years, health care REIT HCP (NYSE: HCP) says it is prepared to ride out the headwinds associated with the transition.

Despite being positioned for long-term success, the Irvine, California-based health care REIT said in announcing fourth quarter earnings Thursday that the costs of the transition will temper earnings into 2019.

The restructuring of HCP’s senior housing portfolio adversely impacted earnings, company executives said during a Thursday call with industry analysts. The triple-net lease portion — which accounts for two-thirds of the portfolio — saw same-store cash net operating income (NOI) growth of 2.5% for the quarter, and 2% for the year. Same-store senior housing operating portfolio (SHOP) income, however, dropped 11.6% in Q4, and 3.8% for the year, which HCP CIO Scott Brinker attributed to higher short-term expenses in the REIT’s 15-property transition portfolio.

HCP’s Q4 2018 and full-year.senior housing performance.

HCP’s transition portfolio has established operators such as Atria Senior Living, Sunrise Senior Living, Elmcroft by Eclipse Senior Living, Discovery Senior Living and Sonata taking over from Brookdale.

“We transitioned 38 properties from triple-net to SHOP, in total, half of that in the second half of 2018,” Brinker said. “Those later assets are going through lower occupancy rates and crazy expense increases. Insurance [is] up 80%, maintenance rose 60%, contract labor is up 10 times what is normal.”

The properties which underwent the triple-net to SHOP transition earlier showed signs of stabilization by the end of the year, Brinker said. He expects the later assets to recapture value over time.


Although the triple-net leases will begin to expire later this year, Brinker indicated that transitioning to a SHOP structure would be reviewed on a case-by-case basis. Discussions on lease transitions are ongoing.

For the quarter, HCP generated net income of $83.2 million, or $1.73 per share. Funds from operations (FFO) came in at $195.2 million, or $0.41 per share, and adjusted FFO was $0.43 per share. Total revenue was $441.92 million, down slightly from Q4 2017’s $443.26 million. The FFO was in line with estimates, yet lower than last year’s $0.48 per share.

HCP completed its disposition of senior housing communities operated by Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) to Apollo Global Management. Last November, the REIT closed on the $1 billion sale of Shoreline Technology Center in Mountain View, California, recognizing a gain on the sale of $726 million.

Heading into 2019, HCP will make incremental tweaks to improve its senior housing portfolio and operator mix, CEO Tom Herzog said. With a new leadership team in place, the REIT is able to fine-tune and formalize responsibilities.

As part of the new leadership, HCP hired Jeff Miller for its senior housing team. Miller comes to HCP from Welltower (NYSE: WELL), where he spent a decade in roles including COO and general counsel. Miller will be responsible for senior housing finance and asset management, and reports directly to CIO Scott Brinker.

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