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HCP Announces Strategic Portfolio Trades With Brookdale

Zacks Equity Research

HCP, Inc. HCP recently announced a series of portfolio transactions with Brookdale Senior Living Inc. BKD related to a 15-campus continuing care retirement community (“CCRC”) joint venture (JV) and a triple-net portfolio.

With these transactions, HCP take full ownership in its CCRC JV with Brookdale, sell a portfolio of 18 triple-net leased properties to the operator, and reset lease and management agreements. These transactions relating to 35 HCP-Brookdale properties will improve operator diversification, reducing Brookdale’s concentration in HCP’s portfolio from 16% to 8% of cash net operating income on a pro-forma basis.

CCRC Transactions Details

HCP will pay $510 million to purchase Brookdale's 51% JV interest in 12 CCRCs consisting of 5,641 units. The remaining three properties in the existing JV will be jointly marketed for third-party sale, which is anticipated to close over the next 12 to 18 months.

Further, both parties have agreed to end management agreements on the 12 CCRCs, and HCP will pay $100 million (equivalent to nearly five times annual management fees) as termination fees to Brookdale.

Management of these campuses will be transitioned to Life Care Services (LCS) under a highly incentivized contract, resulting in yearly savings of roughly $7 million.

Subject to customary closing norms, the transaction and operator transition is expected to close in first-quarter 2020.

Triple-Net Transactions Details

HCP will sell 18 triple-net leased properties to Brookdale for $405 million. This represents 7.4% lease yield on the trailing 12-month rent and 0.86x rent coverage (after management fee) as of the end of the second quarter. Subject to customary closing norms, this transaction is projected to close in first-quarter 2020.

The company has reconfigured the remaining 24 Brookdale triple-net leased properties into a single master lease, carrying 2.4% annual escalators. This lease will mature on Dec 31, 2027

Moreover, in a bid to strengthen the remaining Brookdale triple-net portfolio, HCP will offer up to $35 million in capital investment, over a time span of five years. It will receive 7% initial return on this invested capital.

Other Sale and Operator Transition Deals

HCP will also terminate agreements related to one Brookdale triple-net leased property. The property will be converted to a senior housing operating portfolio and its management will be transitioned to LCS. Furthermore, another SHOP property will be available for sale to third parties.

In a separate press release, the company announced it has received corporate credit rating upgrades by Fitch Ratings. Specifically, Fitch upgraded HCP's corporate credit rating to BBB+ from BBB, with a stable outlook. Reduced leverage levels, easy access to capital markets, improved portfolio quality and strategic investment moves were key rating drivers.

While the transaction with Brookdale will be slightly accretive to HCP’s earnings, the rating upgrade improves its credit worthiness.

Shares of this Zacks Rank #3 (Hold) company have gained 15.6% over the past six months compared with the industry’s rally of 6.3%.

Stocks to Consider

Some better-ranked stocks from the real-estate space include Alexandria Real Estate Equities, Inc. ARE and Mid-America Apartment Communities, Inc. MAA, both carrying a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alexandria Real Estate’s Zacks Consensus Estimate for 2019 funds from operations (FFO) per share has remained unchanged at $6.98 in the past month.

Mid-America’s Zacks Consensus Estimate for the ongoing year’s FFO per share climbed marginally to $6.30 in a month’s time.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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Brookdale Senior Living Inc. (BKD) : Free Stock Analysis Report
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