Senior housing will continue to provide challenges for HCP in 2019, but the real estate investment trust’s portfolio will start to see sequential improvement in net operating income, executives predicted Thursday on a fourth-quarter and full-year 2018 earnings call.
“The year-over-year growth rate will almost certainly be negative for at least the first half of 2019,” Chief Investment Officer Scott Brinker said. “But we are seeing improvement sequentially, and I think by the end of the year there’s a good chance that you’ll start to see a year-over-year increase in the net operating income growth and, hopefully, into 2020 and 2021.”
Several trends are encouraging, Brinker said. “First, the penetration rate is growing as the physical, cognitive and social benefits of senior housing are becoming better understood,” he said. “Second, new starts have declined to a level where supply and demand should be more in balance within the next two years. And finally, the growth rate for the 85+ cohort, which actually hit a trough in 2018, is now at the very beginning of an upward slope that will gather momentum over the next 10 years and act as a tailwind for several decades.”
Actions taken by the REIT in 2018 were “dilutive to earnings in the near term” but necessary for the long term, he said. Among the moves, Brinker said: HCP sold $1.5 billion of non-core senior housing assets; transitioned 38 properties to new operators, with a related improvement occupancy; added two operating partners, Discovery and LCS; put 10 “well-located but older” assets into redevelopment to position the properties for the long term; exited or went under contract to exit five operator relationships to improve efficiency; and made changes to systems and the organizational chart.
The triple-net portfolio reported cash net operating income growth of 2%, which was above the high end of HCP’s guidance range, Chief Financial Officer Pete Scott said. In its senior housing operating portfolio, HCP reported NOI growth of -3.8%, which was at the low end of its guidance range.
“It’s been a systematic process, and we are definitely playing the long game on this one, because we believe we can create a very good business in a business that’s quite inefficient, meaning that there are going to be some that do well and some maybe not so well,” President and CEO Tom Herzog said. “We’d like to be part of the group that does well in this business, because we see long-term prospects being very good.”
Among the recent personnel moves, Herzog said, was the addition of Jeff Miller as senior vice president of senior housing asset management.
“For those of you who don’t know Jeff, he brings tremendous experience to HCP, having spent over a decade at Welltower in roles including general counsel and chief operating officer,” he said. “During his time at Welltower, Jeff worked closely with Scott Brinker. At HCP, Jeff is responsible for day-to-day operations of our senior housing finance and asset management teams and reports directly to Scott, who continues to lead our senior housing business.”
Herzog predicted more senior housing-related changes for 2019 amid pressures in occupancy and expenses.
“You will see us continue to work to make incremental moves to improve our portfolio and operator mix while supporting our platform with enhanced asset management capabilities and data analytics,” he said. “We have come a long way in the last two years, but there is still plenty of room for additional improvement and upside, and we intend to pursue them aggressively.”
HCP expects net operating growth in senior housing of -1.5% to 1.5% in 2019, Scott said.