Brookdale woes drag down HCP portfolio performance

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Thomas M. Herzog
Thomas M. Herzog

Brookdale Senior Living properties negatively affected the performance of HCP's senior housing operating portfolio in the second quarter as the country's largest senior living operator experienced a higher-than-expected decline in occupancy due to under-spending on marketing and sales, above-average turnover of sales directors and distractions caused by discussions about its future, HCP leaders said Tuesday in an earnings call.

The Irvine, CA-based healthcare real estate investment trust's senior housing operating portfolio accounts for 17% of the company's business, President and CEO Thomas Herzog said, and those properties primarily are managed by Brentwood, TN-based Brookdale. The senior housing operating portfolio experienced a 3.8% drop in net operating income in the quarter, and occupancy decreased to 86.8%, from 88.7% in the second quarter of 2016.

“Brookdale has been responsive to our concerns and is executing corrective measures,” Herzog said.

Nonetheless, the CEO said, HCP continues to look for ways to reduce the concentration of Brookdale communities in its portfolio, hoping to get exposure down to 20% or less. “In the last 12 months, we have sold or transferred 67 Brookdale properties, a 40% interest in RIDEA II and are currently marketing another [25] properties,” he said.

Of those 25 communities, Chief Financial Officer Peter Scott said, HCP is under contract to sell five for $31 million and expects the transaction to close later this year.

“We continue to market and assess the remaining 20 assets and expect to sell or transition them by the end of the year,” he added. The company has seen “strong interest” in those properties from private equity firms and operators, Scott said.

Six communities were responsible for approximately 100 basis points, or almost half, of the overall occupancy decline of 190 basis points in the senior housing operating portfolio, Scott said. Occupancy declines at those properties — located in Florida, Illinois and Rhode Island — averaged 11%, he said.

“We intend to vigorously asset manage this portfolio, and if we don't see an improvement in performance, we may look to reposition or dispose of some or all,” Scott said. Herzog added that some of the communities may be transitioned to other operators.

Scott said that initiatives for the second half of the year will result in increased spending on marketing and advertising at Brookdale communities in HCP's portfolio. “We were lower in the first half than what we had budgeted, and we know that those type of expenditures generate leads,” he said.

The departure of sales directors also affected lead generation and lead execution, Scott said.

The entire senior housing industry has been affected by new supply, compensation costs and a severe flu season, Herzog said.

Overall, second-quarter revenues of $458.93 million beat analysts' expectations by $4.77 million, and the REIT's second-quarter funds from operations, at $0.48, beat analysts' expectations by $0.1.

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