HCP Shifts to Acquisition Mode with $558 Million in Senior Housing Deals

Eight months after announcing it was “back to playing offense,” HCP (NYSE: HCP) made good on that promise during its Q1 2019, highlighted by a flurry of acquisition activity.

“With our transition plan behind us, our cost of capital has improved and we are growing the company again,” HCP Chief Investment Officer Scott Brinker said during an earnings call Thursday.

After divesting in $1.5 billion in real estate across its three service lines over the previous five quarters, the Irvine, California-based health care real estate investment trust (REIT) spent $699 million on acquisitions in the first quarter — $558 million on senior housing.


The marquee transaction was a $445 million deal to acquire nine senior living communities operated by Discovery Senior Living. HCP agreed to provide up to $40 million of junior financing on four new developments to be developed and operated by Discovery which carry a purchase option at a 6.25% cap rate, based on stabilized net operating income (NOI) and occupancy targets.

The deal is structured as a joint venture and adds Discovery to the REIT’s growing senior housing operating portfolio (SHOP). The communities are continuum of care projects built on the “Discovery Village” model, encompassing about 200 to 300 units spread across independent living, assisted living and memory care.

HCP also acquired a three-property senior housing portfolio California operated by Oakmont Senior Living for $113 million, and expanded its RIDEA partnerships with Oakmont and Sunrise Senior Living.


For the quarter, HCP reported funds from operations (FFO) of 43 cents per share, which was in line with analysts expectations. The company reported revenues of $436.15 million for the quarter, a 9% drop over Q1 2018.

HCP also reaffirmed its 2019 guidance. The earnings continue a strong showing for health care REITs in Q1. Both Ventas and Welltower reported strong Q1 earnings.

Senior housing performance holds steady

HCP’s overall portfolio saw a 3% increase in same-store NOI in the first quarter, led by a 6.5% growth in its life sciences vertical and a 4.2% improvement in medical office building NOI, year-over-year.

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HCP’s senior housing segment, meanwhile, continued to lag as the REIT completes a transition of underperforming assets and leases to focus on high-quality real estate and operators. Same-store cash NOI fell -0.7% in Q1, compared to the same time frame last year as the portfolio’s transition continues to impact earnings.

HCP’s senior housing triple-net portfolio increased 2.4% in Q1, while its senior housing operating portfolio (SHOP) fell 7.7%, year-over-year.

“Like its peers, HCP’s SHOP portfolio is suffering from elevated supply growth and higher labor costs,” Green Street Advisors Senior Analyst Lukas Hartwich wrote in a note to investors. “However, HCP’s portfolio is also seeing greater-than-average disruption from operator transitions, which is likely to ease as the year progresses.”

Higher temporary expenses within its transition portfolio — notably maintenance and repair fees — continued to impact earnings, as operators such as Atria Senior Living, Sunrise Senior Living, Elmcroft by Eclipse Senior Living, Discovery Senior Living and Sonata assumed management duties of former Brookdale Senior Living (NYSE: BKD) assets.

“While there remains softness in our senior housing portfolio, SHOP performance was in line with expectations,” HCP CEO Tom Herzog said.

The Discovery and Oakmont acquisitions, as well as expanding the RIDEA relationships with Oakmont and Sunrise Senior Living, indicate HCP’s senior housing performance is ready to turn a corner.

The Discovery portfolio, totaling 1,242 units, is mostly concentrated in Florida, currently have a 79% occupancy rate and an average age of two to three years. The buildings are 200 to 300 unit communities with a full continuum of care.

The deal has an initial capitalization rate in the 4% range, and Brinker believes there is tremendous potential to boost NOI to increase that cap rate to 6%.

“Our purchase price is in line with replacement costs,” he said. “There is very little leakage in cap rate because of the age of the portfolio.”

HCP is transitioning 35 Sunrise Senior Living properties from triple-net leases to RIDEA structures. It completed 18 in Q1, and expects to have the remainder moved to RIDEA by year-end. The decision to expand the relationship was opportunistic on HCP’s part, Brinker said. The properties were not at risk of default. Instead, they were tied to leases HCP inherited when it acquired the portfolio from CNL Healthcare Properties a decade ago in complex structures that did not function like traditional triple-net leases.

Even though buildings in the portfolio are about 20 years old, half of the portfolio’s NOI is generated in high-density metro markets such as New York City, Los Angeles and Washington, D.C. So HCP decided to enter direct alignments with Sunrise.

“This was 100% our decision,” Brinker said

Signs of things to come

The Discovery and Sunrise deals are indicative of HCP’s future growth strategy. Acquiring such a high-quality portfolio like Discovery is a rarity at this late stage of the real estate boom period, Herzog said.

“We’re seeking to move to higher quality assets with dynamic operators,” he said.

HCP is not finished reshaping its operator mix. The company has cut its operator partnerships from 25 a year ago to 20 totaling 250 properties. Brinker indicated he would love to cut the number of operators even lower, to 10-15 quality partners.

“Having good operators is critically important,” he said. “We want to have a critical mass of select group of partners. We’re making a lot of progress on that.”

Moving forward, HCP intends to use proceeds from dispositions to fund its future acquisitions across all three service lines. And the company is not done selling off senior housing assets. The company is in active discussions with Vero Beach, Florida-based Harbor Retirement Associates (HRA) regarding disposing of part of its 14-property portfolio, Brinker said. Four assets are under contract, and another two to three properties have been identified for sale.

A portion of those proceeds will be reallocated to senior housing acquisitions, rather than reallocating proceeds from HCP’s other service lines to senior housing, Herzog said.

HCP expects its portfolio mix to remain the same, as well. Although the Discovery and Oakmont acquisitions are notable, Herzog expects senior housing to account for up to 40% of its real estate mix in the future. The service line accounts for 33% of its portfolio now.

“The fact is we have more opportunity to do things in senior housing than we can possibly fund,” Brinker said. “We can pick what we do.”

HCP ended the trading day Thursday with its shares up 2.04%, at $30.54

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