HCP: Bullish on Brookdale Joint Venture and Ready for Growth



February 10, 2015, Tim Mullaney, Senior Housing News - Real estate investment trust HCP Inc. (NYSE: HCP) is undeterred by recent lackluster results from Brookdale Senior Living (NYSE: BKD), and is growing its continuing care retirement communities joint venture with the provider, company officials said in an earnings call Tuesday.

A $1.2 billion strategic joint venture with Brookdale Senior Living (NYSE: BKD) was the main driver for an "outstanding" growth year in 2014, HCP Executive Vice President and Chief Investment Officer Paul Gallagher said Tuesday in a call announcing fourth quarter earnings. The deal involved 14 CCRCs that the two companies agreed to jointly own. It resulted in a $0.04 per share net benefit, according to the newly released earnings statement.

The HCP earnings call came just days after Brookdale revealed a large loss tied to problems integrating Emeritus Senior Living, which it acquired in a blockbuster deal last year. In conjunction with that merger, HCP and Brookdale executed the joint CCRC venture and also created a 49-property RIDEA portfolio and 153-property triple-net lease portfolio of former Emeritus properties.

Perhaps providing some assurance that the overall Brookdale-Emeritus integration will become smoother, HCP noted that its RIDEA properties have been successful.

"Brookdale reported lower than expected results in the fourth quarter and lowered guidance for 2015, primarily due to a 40 basis point sequential occupancy decrease driven by legacy Emeritus assets," said Gallagher. "However, HCP's 68 RIDEA facilities operated by Brookdale experienced a sequential occupancy increase of 70 basis points, as a result of our efforts to identify and commence the capital investment plans for the legacy Emeritus RIDEA assets immediately upon closing the merger."

The Brookdale joint venture is poised to grow early in 2015, Gallagher noted. HCP is set to acquire a newly developed assisted living community in Houston for $36 million, and is working with Formation Capital to create an independent living facility on the same site. These assets will be contributed to the Brookdale joint venture after closing, which is anticipated to occur in this quarter.

In contrast to its outlook for CCRCs, HCP's skilled nursing business is more troubled, its executives noted. In particular, there are issues related to HCR ManorCare, which has 333 properties master-leased to HCR. ManorCare has taken hits to its bottom line, due largely to shifts in Medicare reimbursements, said HCP President and CEO Lauralee Martin. ManorCare has agreed to market for sale 50 of its HCP facilities. The facilities to be sold have been deemed non-strategic.

Just as the Medicare changes affecting HCR ManorCare are being felt by other skilled nursing providers, legal issues swirling around the company are similar to those confronting other large players in the sector such as Kindred (NYSE: KND) and Genesis (NYSE: GEN), Martin said. She was addressing the fact that ManorCare has been under investigation by the Department of Justice since 2013.

The investigation had been disclosed but was not as prominent in previous earnings reports as it was in this one, several analysts noted.

Some analysts attempted to draw out the HCP executives on whether they are pessimistic about skilled nursing. SNFs have faced regulatory challenges but HCP is "not at all negative on the space," Martin said. When asked whether HCP might now be more inclined to purchase large senior housing portfolios to limit skilled nursing risk, Martin and her colleagues were noncommittal.

Overall, HCP's adjusted funds from operations increased by 4% year-over-year, to $0.79, and funds available for distribution increased 8%, to $0.66 per share. It increased its quarterly cash dividend 3.7%.

Written by Tim Mullaney