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Brookdale's possible sale hurt Q2 results, HCP execs say

HCP Inc.'s seniors housing properties managed by Brookdale Senior Living Inc. performed worse than expected in the second quarter, in part because Brookdale's ongoing process of exploring a sale distracted company leaders, HCP executives said.

On an earnings conference call, HCP President and CEO Thomas Herzog specifically blamed delays in sales and marketing spending and director turnover at the operator. "Brookdale has been responsive to our concerns and has executed corrective measures," he added.

Nevertheless, Herzog said HCP's full-year guidance is especially conservative, incorporating assumptions about the Brookdale properties that are more modest than Brookdale's own predictions. HCP is continuing to try to reduce its exposure to Brookdale, its top tenant, to 20% or less of its portfolio, Herzog said. The real estate investment trust has sold or transferred 67 Brookdale-managed properties in the past 12 months, and is marketing another 27 properties, he said. The company is under contract to sell five of those assets in a deal it expects to close by the end of 2017.

Brookdale recently reached an agreement with activist shareholder Land & Buildings Investment Management LLC to add a director to its board. Rumored acquirers for the company have included Zhonghong Zhuoye Group Co. Ltd., Ventas Inc. and Blackstone Group LP.

HCP executives said they have identified six seniors housing properties that were responsible for a large share of the performance decline in the second quarter, and will consider repositioning or selling them if improvement efforts do not succeed.

Pressed on the difference between their own expectations for the balance of 2017 and Brookdale's, company executives acknowledged that Brookdale's leaders have a plan for improved performance in place. Still, CFO Peter Scott said, "there is a lag time associated with the ability to actually get that performance."

"We know that they have a lot going on, and they are working hard, together with us, to seek a resolution for this," Herzog said. "But again, we felt it appropriate to add some conservatism to the numbers."

Herzog declined to detail the company's strategy for reducing its Brookdale exposure. Asked by an analyst whether it could include a large portfolio sale or smaller property sales, he replied: "I have been in conversations with senior management at Brookdale, and it would be premature for me to speak to the proactive measures that will be taken over time to reduce the exposure. It's a fair question, but not one that I can answer right now."