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HCP Remains Confident in New and Engaged Operators


The last two years have been a whirlwind of activity for HCP Inc., during which the company has fully restructured and set forth a clear strategy. “The HCP of today is very recognizable from the HCP of just a couple of years ago,” explained president and CEO, Tom Herzog, on the firm’s Q3 earnings call.

“Including the announcement of the Shoreline transaction, we sold, spun or transitioned over $12 billion of non-core assets. We repaid $5.7 billion of debt. We reduced our Brookdale concentration from 35% to 17% of NOI. We expanded our development and redevelopment pipelines. We recruited and installed an entirely new C Suite and we refreshed our board. These actions have resulted in a vastly improved portfolio and balance sheet with a cohesive and energized team.”

As for challenges in senior house, Herzog said that “new supply has been a headwind for HCP and the entire sector. However, we are confident, senior housing will be a strong business over time within HCP’s balanced and diversified portfolio of private pay healthcare real estate.”

He also pointed out that the transitions from Brookdale to new operators have been painful and performance declined significantly prior to the replacement operators assuming control. The reduced occupancy impact will carry forward through at least the first half of 2019.

Fortunately, he said, “the vast majority of the transitions are complete and we are finally seeing stabilization. We remain confident that in the hands of new and engaged operators, we will recapture a significant upside to this group of communities over time.”

Finally, he explained, “this year’s capital recycling and redevelopment activities will lean on our 2019 earnings growth as we earn in the dilution from completed sales and experience temporary downtime of properties undergoing redevelopment.”

The company’s 82% on-campus medical office portfolio remained consistent and stable. “We’re also benefiting from our decade-long relationship with HCA through the devolvement program we announced today.” He also noted that the company’s life science business is performing exceptionally well. “We continue to see significant demand from growing tenants.”

HCP also has an $800-million development pipeline that is on time, on budget, fully funded and already 83% pre-leased. “With the strong momentum and strength in the market, we’re evaluating the acceleration of certain projects such as the additional phases of The Shore at Sierra Point. In addition to the cash flow and earnings, these projects will produce beginning in 2019 and accelerating in 2020 and 2021, we expect to realize significant NAV creation for our shareholders. We expect to deliver stabilized returns in the 7% to 8% range which compares to the corresponding market cap rates of about 5%.”

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