Scott Brinker
HCP Chief Investment Officer Scott Brinker

Activity occurring after the end of the first quarter dominated much of HCP’s first-quarter earnings call Thursday, with the real estate investment trust announcing $558 million in senior living acquisitions that happened in April and May.

HCP acquired a $445 million portfolio of nine Discovery Senior Living communities — seven in Florida, one in Georgia and one in Texas — as well as a $113 million portfolio of three Oakmont Senior Living communities in California.

“These acquisitions are strategic to where we’re taking our senior housing business, including a relationship-driven growth strategy, improved operator diversification and alignment, modern physical plants, and higher-quality real-estate,” Chief Investment Officer Scott Brinker said, reiterating the REIT’s plan, discussed previously by executives, to reposition the REIT’s senior housing portfolio.

The Discovery acquisition, a total of 1,242 units — 649 independent living, 420 assisted living and 173 memory care — with overall occupancy of 79%, occurred in April. The properties range in age from recently opened to six years old, with an average age of three years, Brinker said.

In conjunction with the acquisition, HCP agreed to provide up to $40 million of junior financing on four new developments to be operated by Discovery. Three of the developments will expand the campuses of the properties that HCP just acquired.

“What we like about the Discovery portfolio is just the scale of the communities,” President and CEO Tom Herzog said. “Either as of today or post-expansion, these are going to be 200- to 300-unit campuses but offer the full continuum [of independent living, assisted living and memory care]. And that really is a differentiated product even in Florida, where it’s easy to build 80 units. It’s not very easy to build 300 units.”

The expanded communities will offer “great” economies of scale, Brinker said. “So over time, we think this is going to be one that not only are we thrilled to own and showcase for investors, but will ultimately provide really attractive returns as well.”

The Oakmont acquisition occurred in May, HCP said. The portfolio includes 132 assisted living units and 68 memory care units, with current occupancy of 98%. The properties are an average of three years old.

The REIT also announced the conversion of four Oakmont communities in California already in its portfolio from triple-net leases to RIDEA structures and the completion of the conversion of 18 of an expected 35 Sunrise Senior Living communities from triple-net leases to RIDEA structures. Fourteen more Sunrise conversions should occur within 60 days, with the balance being completed by the end of the year, HCP said.

Converting more senior housing properties from triple-net leases to the operating portfolio also is part of HCP’s previously articulated strategy. Chief Financial Officer Peter Scott said that all future HCP acquisitions will involve RIDEA structures, although the REIT’s portfolio will continue to contain triple-net leased properties.

Switching things up

Over the past five quarters, Herzog noted, HCP has sold $1.5 billion in senior housing assets. “And to be clear, we have some additional senior housing opportunities in the queue expected over the coming months,” he said.

But 35% to 40% of the REIT’s current portfolio is in senior housing, with the balance being medical office and life science properties, and Herzog said he expects the mix to remain the same. “And importantly, our portfolio will be increasingly weighted toward modern assets in strong markets with some great new operators, which we think is critical,” he said.

Brinker noted that the REIT’s senior housing portfolio had 25 operators a year ago and now has approximately 20. “And we’ve got 250 properties,” he said. “Hopefully at some point we’ve got more than 250 properties, but if there’s just a static portfolio, I’d love to have 10 to 15 really high-quality partners.”

Performance ‘in line with expectations’

Herzog noted “softness” in senior housing fundamentals but said the REIT’s first-quarter performance was “relatively in line with our expectations.”

Senior housing cash net operating income declined 0.7% in the first quarter. Growth in the triple-net portfolio, which represents 24% of the REIT’s same-store pool, was 2.4%. The senior housing operating portfolio, which represents 10% of the REIT’s same-store pool, declined by 7.7% but was in line with expectations, Scott said.

“Our [senior housing operating] portfolio continues to be impacted by our transition portfolio as well as from a supply / demand imbalance due to new deliveries,” he said. “However, we are encouraged by the positive 29% sequential growth in our transition portfolio, albeit the first quarter is typically a seasonally high quarter for [net operating income].”

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