HCP to Focus on High-Growth Sectors after Spinning-Off HCRManorCare

By Gail Kalinoski, Contributing Editor

Kevin Tyler, Analyst, Green Street Advisors

Irvine, Calif.—Five years after acquiring HCR ManorCare Inc. and its portfolio of post-acute, skilled nursing and assisted-living facilities for $6.1 billion, HCP Inc. has decided the challenges facing that part of the industry were holding back growth of its core “high-growth healthcare sectors” like senior housing, life science and medical office properties and is spinning HCR ManorCare off into its own publicly traded REIT.

“Skilled nursing operators have been out of favor with investors in recent months as Medicare-centric payment changes have impacted industry length-of-stay and reduced payment rates. The ManorCare spin-off allows HCP to separate itself from the struggling entity, while providing investors with the choice of ManorCare ownership via the newly created company,” Green Street Advisors analyst Kevin Tyler said in a written statement provided to Commercial Property Executive.

“HCP will be a more investable entity after shedding the assets and the market may ascribe a higher multiple to the remaining ManorCare-free enterprise,” Tyler added.

A Bloomberg report noted that shares of HCP dropped about 12 percent in the past year compared to a 3 percent increase in the Bloomberg index of healthcare REITs.

Michael McKee, the newly elected Executive Chairman of HCP and a former CEO of Bentall Kennedy, said the decision to spin off HCR ManorCare was the “result of an active and extensive process involving the Board, our executive team and our advisors.”

It became clear, he said during a call with analysts to discuss the spin-off and HCP’s first-quarter 2016 earnings, HCP needed to “eliminate the overhang that exists from the current challenges facing HRC ManorCare, so that the rest of our business can flourish.”

Lauralee Martin, president & CEO, said Monday the transaction “gives HCP the ability to re-confirm itself as a blue-chip, innovative and relationship-oriented healthcare REIT. Post spin, HCP will own a stable, private-pay portfolio that has a track record of delivering consistent, attractive returns.”

Following the closing later this year, HCP will have more than 860 properties that generate an annual income of about $1.4 billion with 95 percent of it coming from the private-pay sector. After the spin-off, HCP’s portfolio will be 54 percent senior housing, 21 percent life science, 19 percent medical office buildings, and 6 percent hospitals.

Richard Anderson, Managing Director, Americas Research, Mizuho Securities USA Inc.

“Importantly, with an investment grade balance sheet and an improvement in our cost of capital over time, we will be well-positioned to accelerate our accretive, external growth opportunities,” Martin said in the conference call.

The spin-off company will have a portfolio with more than 320 properties, led by facilities operated by HCR ManorCare and expected in-place annual rent of about $485 million.

As part of several new appointments, HCP named CRE veteran Mark Ordan a senior advisor and eventual CEO of the spin-off REIT. Ordan is the non-executive chairman of the board of WP Glimcher, formed when Glimcher Realty Trust acquired Washington Prime Group, a spin-off of Simon Property Group. Ordan previously served as CEO of Washington Prime and had also been CEO of Sunrise Senior Living Inc., and CEO & president of The Mills Corp.

“With a singular focus on SNF and assisted living assets and a flexible capital structure, we believe SpinCo will have the tools and flexibility to unlock value in the HCR ManorCare portfolio, as we own, manage, sell or transition assets as desired over time,” Ordan said in a prepared statement.

In addition to announcing McKee’s election as executive chairman and Ordan’s appointment, HCP also said Monday Justin Hutchens has been promoted to chief investment officer and Kai Hsiao, former CEO of Holiday Retirement, the largest operator of independent living communities, joined the company as EVP, Senior Housing Asset Management.

Richard Anderson, managing director, Americas Research, Mizuho Securities USA Inc., noted in an investors report that HCP will have a higher quality portfolio after the split but questions “the path to get there.”

Anderson wrote selling the assets privately “would have been the best outcome, in our view,” but acknowledged it appeared there was no market for that. The report also asked whether the new HCP will itself be an eventual M&A target.

Meanwhile, HCP had plenty of acquisitions of its own to discuss. In its first quarter 2016 earnings report, HCP said it closed and announced $554 million of investment transactions including acquiring a portfolio of five private-pay senior housing communities with 364 units and one skilled nursing facility with 120 beds for $95 million. It also entered into agreements to buy a portfolio of seven senior housing communities for $190 million, including assumption of $75 million of debt, later this year. HCP also began the $185 million Phase II development of The Cove at Oyster Point in South San Francisco, which adds two class A buildings and up to 230,000 square feet at the 1 million-square-foot life sciences development.