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2 internal candidates in the lead for top HCP spot, analysts say

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2 internal candidates in the lead for top HCP spot, analysts say

Jake Mooney is areporter with S&P Global Market Intelligence. The views and opinionsexpressed in this piece are those of the author and do not necessarilyrepresent the views of S&P Global Market Intelligence.

is likely to hire aninternal candidate to replaceLauralee Martin as CEO, and the leading contenders for the job are CFO TomHerzog and Chief Investment Officer J. Justin Hutchens, analysts said.

Martin'sexit may have come sooner than expected, but was not a surprise: She is 65, andguided the company through a difficulttransition after thedismissal of theprevious CEO, Jay Flaherty III, in late 2013. In recent months, analysts havepressed the company's board for details on a succession plan.

WhenMartin took over the CEO seat, board representatives praised her — in pointed contrastwith Flaherty — for giving lower-ranking executives responsibility and makinguse of their skills.

Hutchens,who joined the company in September 2015 after serving as CEO of since2011 (and president since 2009), has been widely discussed as a leadingcontender for HCP's top spot. That narrative was complicated in June, whenHerzog, who served as HCP's CFO from 2009 to 2011, the company after a stint atUDR Inc.

Bothexecutives are well-regarded, experienced and "relatively young," BMOCapital Markets analyst John Kim said, noting that Hutchens is 42 and Herzog is53. While Herzog has C-suite experience at another S&P 500 REIT, Hutchenshas strong relationships with senior care operators, Kim added.

Severalanalysts said there may be other internal candidates in play, including KaiHsiao, executive vice president of seniors housing asset management, whopreviously served as CEO of Holiday Retirement Corp. Mike McKee, the board'sexecutive chairman and the interim president and CEO, is not considered acandidate for the permanent role.

Theselection of a new CEO, in a process that is expected to take three to sixmonths, could alienate the other candidates and make it difficult for thecompany to retain its deep bench in the long term, Mizuho Securities USA Inc.analyst Richard Anderson said in a note. Still, Anderson added, "We seethis as a high-class problem," and one that can be managed with enoughcreativity — and money.

Thenew move is aimed crafting a positive turn in the narrative surrounding thecompany, analysts said. Martin "inherited a difficult situation,"with risky mezzanine investments and a 25% tenant concentration with theoperator HCR ManorCare, Kim said. And, Evercore ISI analysts led by Steve Sakwasaid, she arrived just as operations at ManorCare were beginning to .

Nowthat properties linked to HCR ManorCare are being into a new company and thenew-look HCP will be re-introduced to investors, a new forward-lookingleadership team is important, Sakwa's team added. In particular, they said, thespinoff will have to raise debt financing, and pre-marketing for that deal isexpected to begin imminently. Based on HCP's earlier debt ratio estimates forthe new company, the capital raise could be in the $1.7 billion to $1.8 billionrange.

Amongthe other tasks that remain are recruiting a new board of directors for thespinoff, reducing leverage at the portion of HCP that remains after the spin,and possibly reducing the remaining company's tenant concentration withBrookdale Senior Living Inc.,analysts said.

Accordingto management estimates, the spinoff remains on track for mid- to lateSeptember, the Evercore ISI analysts wrote.