Thomas M. Herzog
HCP President and CEO Tom Herzog

HCP continues work to transform the senior housing part of its portfolio, closing on $866 million in acquisitions in the second quarter, among other actions.

The transformation effort “includes recycling capital away from older, non-core properties and misaligned deal structures for modern real estate in attractive markets with leading operators,” President and CEO Tom Herzog said Thursday during the real estate investment trust’s second-quarter earnings call.

“HCP is well positioned as the fundamentals in the sector begin to improve over the next couple of years,” he said.

Senior housing currently represents 37% of the REIT’s net operating income, which falls within the range of 35% to 40% that HCP is aiming for, Herzog said. The portfolio “has performed generally in line with our expectations,” he said.

The short-term outlook for supply and demand, Chief Investment Officer Scott Brinker said, varies by local market. “A big part of our strategic plan is to position ourselves to be one of the outperformers in each of the local markets,” he said.

The REIT’s “best guess” for when balance will be achieved, based on data and discussions with operators, Brinker said, is late 2020 to early to mid 2021.

Longer-term predictions are difficult as well, he said, but trends related to the labor market, supply and penetration “suggest that over the next five years, supply and demand fundamentals should be quite good. But we do continue to think that it’s more back-end weighted than front-end weighted on that five-year outlook.”

In the meantime, Brinker said, the HCP team has created a strategic plan for every one of the REIT’s senior housing properties and their operators.

“The data-driven analysis to assess the performance outlook for each asset includes supply and demand, location analysis, competitive positioning and quality of physical plant,” he said. “Each property was categorized as either ‘core,’ ‘redevelop’ or ‘sell.’ We created a strategic plan for each operating partner as well, each partner being categorized as either ‘grow,’ ‘maintain,’ ‘reduce’ or ‘exit.’ …The actions you’re now seeing from HCP quarter after quarter represent … the execution of an intentional and long-term strategic plan.”


HCP said it closed on $582 million in previously announced senior housing acquisitions in the second quarter:

  • In April, the REIT closed on the previously announced acquisition of nine newly built senior housing properties operated by Discovery for $445 million. The properties are located in Florida (7), Georgia (1) and Texas (1).
  • In May, HCP closed on the previously announced acquisition of three newly built senior housing properties operated by Oakmont and located in California (Los Angeles, Bay Area and Sacramento) for $113 million.
  • The REIT also closed on $24 million of other miscellaneous senior housing acquisitions.

HCP also closed on one $284 million newly announced acquisition in July:

  • In July, HCP expanded its relationship with Oakmont Senior Living by acquiring a portfolio of five properties in California for $284 million. The properties, with a total of 430 units, are located in Huntington Beach, Los Angeles, San Jose and San Francisco. The average age of the properties is less than two years. “Oakmont sells their properties faster than anyone I’ve ever seen,” Herzog said, calling the company “a fantastic operator.” “We think California is a good place to do business long-term, and we’d like to do more with Oakmont going forward,” he said.

Also in the second quarter, HCP:

  • HCP agreed to sell its direct financing lease interests in 13 non-core senior housing properties to Prime Care and its affiliates for $274 million. The properties currently are leased to Prime Care under direct financing leases and were acquired by HCP as part of the CNL transaction in 2006. The properties are managed by Sunrise Senior Living (11) and Harbor Retirement Associates (2). The transaction is expected to close in September. “The disposition of these properties is consistent with HCP’s strategy of eliminating complex financing arrangements that do not align incentives among the parties, and recycling capital into newer properties,” HCP said.
  • The REIT renewed its 10-property senior housing master lease with Aegis Living for an additional 10 years. The master lease, which includes properties in California and Washington, now matures in July 2030. The existing annual rent, which is approximately $90 million, will escalate at 3% per year through 2030.
  • HCP entered into an agreement with HRA to amend existing leases. HCP will sell six low-performing, non-core properties and combine the remaining eight properties into a single master lease with a common maturity date in December 2028 and 2.5% annual rent escalators. “The primary goal there was to ‘right size.’ The portfolio was 14 assets, and neither HRA nor HCP wanted to own or operate all 14 assets,” HCP Chief Financial Officer Peter Scott said. “So we’re going to sell six, and the eight that we’re left with are core assets for HRA. They’re in their home state of Florida, and they think they have upside. The buildings are 20 years old, so we’re going to put some capital into the real estate.”
  • The REIT completed the previously announced conversion of 15 senior housing properties operated by Sunrise Senior Living from triple-net leases to RIDEA structures. This follows the conversion of 18 other Sunrise properties to RIDEA in the first quarter. HCP expects to convert two additional Sunrise triple-net lease properties to RIDEA structures in the second half of this year. Sunrise will remain the operator of all 35 properties.

HCP has a “solid pipeline,” Herzog said, predicting growth via “embedded opportunities” with Discovery, Oakmont and other companies.

Brookdale relationship

Asked whether an activist’s investor’s desire to have former HCP CEO Jay Flaherty fill a seat on the board of Brookdale Senior Living would change the REIT’s relationship with the country’s largest senior living company, Herzog said it is “hard to say.”

“Brookdale is an important, valued partner,” he said, adding that HCP supports the company’s recent initiatives to try to enhance care and operations. “We are monitoring it closely, but …it’s really up to the shareholders of Brookdale and their board to determine what’s the optimal outcome for the board.”

Asked whether the REIT would consider pursuing additional business with Brookdale, Herzog said he and Brookdale President and CEO Lucinda “Cindy” Baier have routine conversations on different opportunities that we can consider.”

“There are things we can do, but obviously it would be very premature for me to get into any of those details. But that dialogue is taking place and certainly would take place in the future as well, regardless of who is on that board,” he said. “So stay tuned. There is nothing imminent, but those are certainly things that we are considering in the future.”

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