A third of the former “Big Three” senior housing real estate investment trusts is wearing a different color: HCP Inc. (NYSE: HCP) plans to slice its portfolio into three equal segments over the next few years.
Chief Executive Thomas Herzog said in a recent earnings call that the firm plans to focus on “medical office, life science and senior housing, so call it a third, a third, a third … the three private-pay real estate segments of healthcare.”
The Irvine-based REIT plans to grow its medical office and life science portfolios, the latter via development.
“We have a sizable development pipeline,” Herzog said, in the vicinity of $800 million and about a million buildable square feet.
Meanwhile, HCP is expanding its life-sciences campuses in San Francisco and Boston.
Adieu, Sr. Housing
The Big Three—HCP, Toledo, Ohio-based Welltower Inc. (NYSE: WELL) and Ventas Inc. (NYSE: VTR) in Chicago—have been known for investing mostly in senior housing assets. But recent federal healthcare reimbursement changes have led the REITS to reshuffle their portfolios, including by reducing skilled nursing exposure. HCP, though, has traversed the furthest in that direction.
It has about 38% senior housing assets, significantly less than Welltower and Ventas, at 79% and 66% respectively, according to the most recent annual reports to Securities and Exchange Commission. And it plans additional dispositions in the category.
Still, Richard Anderson, senior REIT analyst with Mizuho Securities USA LLC, said he considers HCP a Big Three.
“HCP is about two-thirds the size of Ventas and Welltower, but in all fairness, there’s really no one close than that beyond HCP,” he said, adding that “Big Two-and-a-Half just doesn’t quite have the same ring to it.”
He said the next-closest competitor is Omega Healthcare Investors Inc. (NYSE: OHI), which has about a $6 billion market cap, compared to HCP’s $12 billion. Welltower and Ventas both exceed $20 billion in market cap.
On top of continued cuts in assets operated by senior housing operator Brookdale Senior Living Inc. (NYSE: BKD)—HCP has been negatively impacted by the operator, whose revenue and occupancy have declined since it bought Seattle-based senior housing operator Emeritus Corp. in 2014—the REIT released a second-quarter list of “noncore sale transactions that would center around senior housing,” according to Herzog.
Senior housing properties make up 90% of assets held for sale, according to a supplemental HCP report.
It announced in March that it will transition management of a portfolio of 24 senior housing communities from Brookdale to Louisville, Ky.-based Atria Senior Living Inc., to be completed by September.
Development
The repositioned HCP portfolio is focused on specialty office, which is comprised of medical offices and life sciences buildings.
The REIT recently announced it entered a $605 million joint venture with Morgan Stanley Real Estate Investing on a 2-million-square-foot medical office building portfolio. Morgan Stanley and HCP will own 49% and 51% of the portfolio, respectively, the former providing cash to the joint venture, the latter contributing nine wholly-owned medical office buildings valued at approximately $320 million. The assets, primarily in Texas and Florida, have 1.2 million square feet of leasable space and are 80% occupied.
The joint venture will use Morgan Stanley’s cash to fund the $285 million acquisition of a medical office portfolio in Greenville, S.C.
HCP’s life sciences properties are on campuses in core life sciences markets. It recently commenced two development projects, a $160 million building at Hayden Research Campus in Boston and a $107 million fourth phase of The Cove in South San Francisco.
Analyst Anderson said all of the Big Three senior housing REITs have pared down exposure to skilled nursing and that each has developed its own portfolio makeup strategy.
“All good, just different.” He said life sciences is a good asset class to be in, calling it “the largely non-regulated world of healthcare real estate.”
New Campuses
HCP is the largest life sciences landlord in South San Francisco, according to regulatory filings. It owns The Cove, a multitenant life sciences development that will total seven buildings. The first two phases—four buildings totaling 477,000 square feet—are fully leased. The REIT said it’s fully leased its 324,000-square-foot third phase and commenced the final, 160,000-square-foot phase, which is scheduled for completion in early 2020.
The REIT entered Boston’s hypercompetitive life sciences market in December with the purchase of Hayden Research Campus for $228 million from King Street Properties in Cambridge, Mass., and the Carlyle Group in New York. The 400,000-square-foot, two-building campus was 66% leased at closing, including major life sciences tenants, such as Shire PLC and Merck and Co.
The campus will encompass 600,000 square feet of leasable Class A life sciences space. In June, the REIT broke ground on the 214,000-square-foot 75 Hayden.
“We have had such favorable results in leasing, and there’s so much continued demand coming at us in some of those markets that we do expect to continue growing that business in life science by way of development,” Herzog said, spending $300 million to $400 million per year.
Team Shifts
HCP’s repositioning has been bumpy, including frequent changes on the executive level. Herzog said during its fourth-quarter and full-year earnings call that last year was pivotal for the company and that it planned to focus this year on completing the repositioning initiatives, which it started in 2016.
Herzog joined HCP in 2016 as executive vice president and chief financial officer. He was promoted to chief executive in January of last year.
Mike McKee stepped down from the executive chairman role and retired from the board on March 1.
Tom Klaritch, previously senior managing director of medical office, was promoted to chief operating officer a year ago after the resignation of Senior Managing Director of Life Science Jon Bergschneider. Klaritch oversees both the life science and medical office businesses.
Bergschneider joined San Diego-based life science-focused REIT BioMed Realty Trust as chief development officer.
Chief Investment Officer Scott Brinker rounded out the executive team when he joined in January. He replaced former President Justin Hutchens, who left the company in April of last year to become chief executive of HC-One Ltd., one of the largest home-care providers in the United Kingdom.
Brinker was most recently executive vice president and chief investment officer at “Big Three” senior housing REIT Welltower.
