HCP Snares HCR ManorCare Properties

December 14, 2010

WOW!  In the largest deal of the year, and the largest since 2007, HCP, Inc. announced today it has entered into an agreement with The Carlyle Group to purchase the skilled nursing and assisted living facilities (338) of HCR ManorCare in a transaction valued at $6.1 billion.  The acquisition is for...

the real estate only and does not include the home health, hospice and therapy businesses of HCR.  In December 2007, Carlyle closed on its acquisition of HCR ManorCare for $6.3 billion which included the real estate and all operations and businesses of the company.  Today's deal will be paid with $3.528 billion in cash, $1.72 billion of funds that HCP will receive from the payoff of its previous debt investments in HCR that will be reinvested in this new transaction, and $852 million in new HCP stock.  HCP will also have an option to purchase a 9.9% interest in HCR ManorCare for $95 million, which puts the theoretical value of the entire company at more than $7.0 billion.

The current price appears to be close to $152,000 per bed/unit, which compares to an estimated $135,000 per bed/unit three years ago after an assumed value for the other operating businesses are deducted from that price.  HCP has stated that the "going in cap rate" is about 7.9%, but we are not sure what the assumptions are for management fee and other expenses.  The properties will be triple net leased starting at $472.5 million per year with 3% to 3.5% escalators and a 1.5x initial EBITDAR coverage (again, may not include a full 5% management fee assumption to get to these numbers).  About 50% of the properties are in four states: Pennsylvania (53), Ohio (50), Iliinois (34) and Michigan (30).  HCR ManorCare has always been known as the premier skilled nursing operator, and its assets, especially for a company of that size, are also considered to be at the highest end for the industry.  On a revenue basis, its quality mix is 71%.  The deal will also be accretive, so investors liked it, sending HCP's shares up today.  We will have more details and analysis in the January newsletter, but this is quite a statement on the cost of capital for REITs and HCP's commitment to the skilled nursing industry in these turbulent times.          




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