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HCP to Acquire Assets of HCR ManorCare In $6.1B Sale-Leaseback

Transaction Shows The Growing Attraction of Investment Capital to Health-Care Real Estate
December 14, 2010
In one of the largest commercial real estate transactions of the last several years, HCP Inc. (NYSE: HCP), the nation's largest health-care REIT, said it will buy all the real estate assets of privately owned HCR ManorCare for $6.1 billion, including $3.53 million in cash.

In an illustration of the relative ease with which public REITs are able to raise capital in the marketplace, Long Beach, CA-based HCP announced Tuesday it has launched a secondary offering of 31 million shares to help fund the purchase, with an option for underwriters to purchase an another 4.65 million shares for 30 days. Later in the day, HCP upsized the offering to 40 million shares priced at $32 due to "strong investor demand," for total proceeds of up to $1.28 billion.

It's also the second mega transaction involving senior care facilities in as many months. In the largest such deal previously, Chicago-based Ventas Inc. (NYSE: VTR) in October agreed to acquire a 118-property portfolio of senior housing assets totaling 13,500 units in New York, New England, Boston and California from privately held operator Atria Senior Living Group for $3.1 billion in stock, cash and assumed debt. As CoStar reported last month, health-care and senior care REITs are beginning to deploy vast sums of equity capital raised over the last couple of years into such deals.

HCR ManorCare operates 338 rehabilitation, skilled nursing and assisted living facilities in 30 states, with the highest concentrations of commercial property in Ohio, Pennsylvania, Florida, Illinois and Michigan. The company, acquired in 2007 by funds overseen by The Carlyle Group, will continue to operate the assets under a long-term triple-net master lease. Additionally, the seller will grant HCP an option to acquire a 9.9% interest in HCR ManorCare for an additional purchase price of $95 million.

In addition to $3.53 billion in cash, the consideration includes $1.72 billion reinvested from the payoff of HCP’s existing investments in HCR ManorCare's debt, and $852 million in HCP common stock issued to HCR ManorCare shareholders. HCP started acquiring HCR ManorCare mezzanine debt in 2007 and invested in its first mortgage in 2009.

HCP expects the acquisition to close late in the first quarter of 2011, subject to certain conditions.

Jay Flaherty, HCP’s chairman and CEO, called the transaction "an important milestone" for the company, which has a market capitalization of $10.82 billion.

"This transaction reinvests our substantial debt investment in a secure long-term, growing income stream that will be highly accretive to HCP’s funds from operations and funds available for distribution," Flaherty. Including this transaction, HCP will have $19 billion in assets in a portfolio of 1,000 properties.

Wall Street's consensus opinion of the deal is largely, as one shop put it, reasonably positive.

Analysts said the deal will result in external growth for HCP, with that upfront accretion rooted in steady if not spectacular cash flow with low operating risk from HCR ManorCare's stable portfolio.

"With the HCR ManorCare deal, HCP is demonstrating its discipline by raising equity and long-term debt in advance of closing," Sandler O'Neill REIT analysts James Milam and Alex Goldfarb said in a research note.

Potential downside risks outlined by analysts include HCP's increased exposure to Medicare reimbursements and the portfolio's net lease structure, which minimizes rent risk but may limit cash-flow growth in the short term.
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