Executives at HCP are not alone in an assessment they shared Wednesday, that they expect senior living supply and demand to be mismatched “in the wrong direction” until 2020 or 2021.
“We’re still positive about that business long-term,” however, Chief Investment Office Scott Brinker said at the Citi 2019 Global Property CEO Conference in Hollywood, FL. “It’s been a great business over the years, but it is cyclical. In the last couple of years, there’s just been a supply / demand imbalance in addition to higher labor costs, but we are committed to that segment.”
Explaining that commitment, Chief Financial Officer Pete Scott said, “If I were to choose one part of our business that has the most upside over the next two to three years, it’s our senior housing business.”
Scott and CEO Thomas Herzog noted that HCP has beefed up its senior housing team to prepare for the growing population of older adults that will change the supply / demand equation.
“The team is set, and we’re hard at work now on building out the process, procedure and information technology, and I think within the next year we will get there,” Herzog said. “We know exactly what we’d like to build, and it’s just a matter of doing the work to get there.”
The executives described a three-pronged plan to reposition the REIT’s senior housing portfolio:
1) Better balance the operator mix. “It’s never good to be dependent on a third party you can’t control,” Brinker said. HCP’s portfolio includes 26,700 senior housing units, according to a presentation the REIT prepared for the conference. The organization has reduced the concentration of Brookdale Senior Living properties in its portfolio and will keep doing so, Herzog said. (Brookdale represented 35% of NOI two years ago and now represents 17%, he said in November.) The operators dominating HCP’s senior housing portfolio right now, according to the presentation, are Brookdale, Sunrise Senior Living, Atria Senior Living, Harbor Retirement Associates and Aegis Living.
2) Improve the quality of the real estate. “The average age in our portfolio is more than 20 years old,” Brinker said. “Most of that product can still compete, but it does require a lot of capital to do so.” The REIT has sold the properties that executives didn’t think could be competitive and is redeveloping or transitioning other properties to new operators, he said. “As we look to do acquisition and development, we will try to acquire more modern properties,” Brinker said.
3) Convert more properties to SHOP from triple-net leases. “Two-thirds of our senior housing portfolio today is triple net; it’s one-third [senior housing operating portfolio],” Brinker said. “We think, over time, that will flip and the majority of that senior housing portfolio will be in the SHOP structure.” The current triple-net leased portfolio has “some really, really good assets” and some operators who may prefer to be in the SHOP portfolio, he said, adding that moving some of them would “pretty dramatically” improve the quality of the SHOP portfolio.