Irvine-based real estate investment trust HCP Inc., which spun off its skilled nursing portfolio and sold a good portion of its senior housing properties this spring, enters into a new phase with “three or four steps forward, one step back,” Executive Chairman Mike McKee said.
The step backward has to do with another executive leaving the company.
Chief Executive Thomas Herzog said Kai Hsiao, executive vice president of senior housing properties, will depart the healthcare-focused REIT during the company’s first-quarter earnings call on May 2.
Hsiao’s departure follows President Justin Hutchens’ April announcement that he’ll leave HCP to become chief executive of HC-One Ltd., one of the largest independent senior home operators in the U.K. Hutchens joined HCP in 2015 as executive vice president and chief investment officer. He’ll remain in his current role through June 1.
HCP has retained executive search firm Russell Reynolds Associates Inc. to look for a CIO with experience in the private-pay healthcare real estate space—“an extremely important hire for us,” Herzog said. McKee, the former chief executive of Newport Beach-based Irvine Company and a prior member of the Business Journal’s OC 50 listing, will temporarily lead HCP’s investment committee.
The exits aren’t good news for the REIT, which had singled out “HCP’s new generation of leadership”—Herzog and Hutchens—as one of its near-term strategic priorities. The “HCP 3.0” initiatives were outlined in November after the company completed the spinoff of the HCR ManorCare Portfolio of 338 skilled nursing properties into the separate, publicly traded Quality Care Properties REIT.
Britton Costa, senior director of healthcare and REITs at Fitch Ratings, however, said the management departures at HCP, though unexpected, weren’t surprising.
“We, as did others, assumed Justin Hutchens was likely one of the internal candidates for the CEO role since he first joined HCP, and particularly after Lauralee Martin stepped down. With Tom Herzog having been named as CEO, it is unsurprising that other qualified candidates would look for opportunities elsewhere,” he said.
Herzog said Hsiao and Hutchens’ departures are “completely unrelated” and that the REIT is committed to strengthen its portfolio by growing private-pay revenue sources in order to maintain a more consistent revenue stream. HCP has about a $14 billion market cap and recently traded at $31 per share.
Other changes to the management team include the promotion of Kendall Young, who’s led HCP’s senior housing investment activity for the past seven years, to senior managing director of senior housing; and the addition of Paul Boethel as senior vice president of senior housing asset management. Boethel was previously a principal at East Lake Capital Management in Dallas.
Private Pay Push
Herzog said HCP is on track to meet its recently adopted initiatives.
“HCP’s total portfolio is now 95% private pay, and we are excited about the quality of our three core segments of senior housing, MOBs [medical office buildings] and life science,” Herzog said.
HCP has over 800 properties in those three categories, the majority in senior housing. It reported revenue of $2.1 billion for the year ended Dec. 31, and the senior housing, life science and medical office segments contributed 52%, 17% and 21%, respectively.
Senior housing remains a major source of income—the segment reported more than $1.1 billion in revenue—though the REIT said it plans to keep decreasing its exposure to Brookdale Senior Living Inc., which operated about 18% of HCP’s real estate investments as of Dec. 31. In both the medical office building and life science segments, HCP reported above a 90% occupancy rate, according to Securities and Exchange Commission filings.
Its portfolio of life science properties is divided between San Francisco, San Diego and Durham, N.C. Herzog said the REIT recently signed a lease with a life science tenant at The Cove at Oyster Point, its newest multitenant life science development in San Francisco. That brings the first two of four phases of The Cove, which consists of four buildings totaling 477,000 square feet, to 100% leased. The REIT has broken ground on the third phase, which will consist of two buildings totaling 336,000 square feet and is slated for completion next year. The fourth phase will add a seventh and final 165,000-square-foot building.
Outlook
Herzog said that while there are challenges in the senior living segment, such as wage pressures and a near-term increase in new property supply, HCP is confident in the growth of the senior demographic in the next two to three years to drive revenue.
When Martin stepped down from the chief executive post in July amid the spinoff of its skilled nursing properties, HCP started searching for executives to lead the company’s new strategy, including a CEO and president. McKee served as interim chief executive until Herzog was promoted on Jan. 1.
The REIT, in addition to spinning off Quality Care, sold a portfolio of 64 senior living properties operated by Brookdale Senior Living to New York-based private equity firm Blackstone Group for $1.1 billion.
