HCP Expects More Even Split Between Triple-Net, RIDEA in 2019

With its senior housing portfolio makeover largely in place, HCP (NYSE: HCP) is now turning its attention to triple-net leases that are coming up for renewal and adding to its RIDEA relationships.

The Irvine, California-based health care real estate investment trust discussed its plans before an audience at the NAREIT 2019 Investor Conference in New York City Wednesday morning.

The REIT overall portfolio will be balanced between senior housing, medical office buildings and life sciences. Senior housing portfolio will account for 35% to 40% of the mix, HCP CEO Tom Herzog said.

HCP’s senior housing portfolio has been reshaped most recently courtesy of a $445 million acquisition of nine properties operated by Bonita Springs, Florida-based Discovery Senior Living and the $113 million purchase of three California senior housing communities operated by Windsor, California-based Oakmont Senior Living.

The acquisitions have had an impact on HCP’s senior housing exposure, Chief Investment Officer Scott Brinker said. Historically, the REIT’s operator mix consisted of 25 operators, with high concentrations of assets among one or two operators — notably Brentwood, Tennessee operator and owner Brookdale Senior Living (NYSE: BKD).

HCP’s turnaround agenda reduced its total operator mix to 10-15 operators and significantly reduced its exposure to Brookdale real estate.

Moving forward, the company wants to maintain a critical mass of assets associated with its operators, without risking overconcentration. Doing so will foster mutually important relationships between HCP and its operating partners, while maintaining flexibility for any future changes to operator leadership structures, Brinker believes.

The Discovery and Oakmont acquisitions have further reduced HCP’s exposure to Brookdale real estate, and the REIT expects its concentration of Brookdale properties to be below 15% by year-end, Herzog said. That is broken into three segments: senior housing operating portfolio (greater than 5%); triple-net lease (less than 5%); and the balance in CCRCs.

HCP is also looking to shift more of its triple-net operators to RIDEA lease structures. Historically, its lease mix has been two-thirds triple net to one-third, RIDEA, with Brookdale accounting for the majority of its triple-net exposure. Brinker expects the mix of triple-net to RIDEA lease to be nearly equal by the end of 2019.

The company has been busy working toward that goal. It extended RIDEA relationships with Oakmont and McLean, Virginia-based Sunrise Senior Living, which the operators entered into willingly, Brinker said.

HCP’s non-Brookdale triple-net leases are split between three operators: Aegis Living, Harbor Retirement Associates (HRA) and Capital Senior Living. Bellevue, Washington-based Aegis Living is the largest tenant. Its leases are set to mature next year, but the rent coverage is strong and HCP is looking to renew its agreement with Aegis, Brinker said.

The company restructured its master lease with Vero Beach, Florida-based HRA and HCP will look to sell roughly half of that portfolio, as previously announced.

The remaining triple-net lease is with Dallas-based operator Capital Senior Living (NYSE: CSU). Capital and HCP have two lease agreements, with most of the rent — maturing in October 2020. The two sides have had active discussions about what to do with the assets.

“I think their likelihood is that they will not renew that lease and that we would end up selling a handful of the buildings that we don’t think are long-term performers,” Brinker said.

If that happens, HCP will transition the remainder to operators which are better positioned geographically to manage them.

The Brookdale, Aegis, HRA and Capital Senior Living leases make up most of HCP’s triple-net holdings, and account for nearly 95% of its current triple-net rent.