HCP planning unsecured debt issuance for HCR ManorCare acquisition

By Jennifer Lanning Drey

Savannah, Ga., Dec. 14 - HCP, Inc. will issue unsecured debt and equity securities to help fund its $6.1 billion acquisition of privately owned HCR ManorCare, Inc., Jay Flaherty, HCP's chief executive officer, said during a Tuesday conference call held to discuss the transaction.

HCP has obtained a $3.3 billion bridge commitment from five banks in connection with the transaction but plans to issue the debt and equity securities rather than borrow on the bridge, he said.

"We don't intend to draw down the bridge at all. It's there merely to provide some certainty for the CMBS, but we will have the entire transaction pre-funded at closing," Flaherty said.

The company launched an offer on Tuesday to issue 31 million shares of its common stock and expects to close on the necessary proceeds during the Dec. 13 week.

HCP is planning to issue unsecured debt in the first quarter of 2011, prior to the closing of the transaction, he said.

"Significantly, HCP intends to incorporate standard REIT covenants in its prospective debt issues, further committing the company to the unsecured marketplace," Flaherty said.

During the question-and-answer session, HCP chief financial officer Thomas Herzog said that based on the company's current debt rates, 10-year debt would come at about 5.75%.

Total consideration for the HCR ManorCare assets consists of $3.528 billion in cash, $1.72 billion reinvested from the payoff of HCP's existing debt investments in HCR ManorCare, and $852 million of HCP common stock issued directly to the shareholders of HCR ManorCare, or at HCP's option, a cash equivalent to the currently agreed value of the shares.

"While our debt investment in HCR Manor Care has produced attractive returns, it also put us in a position to capitalize on this compelling, long-term, accretive acquisition opportunity," Flaherty said.

"We have effectively converted a short-term, opportunistic investment into long-term value for our shareholders."

Tough-to-enter markets eyed

HCP said under the agreement, it will acquire from HCR ManorCare 338 post-acute, skilled nursing and assisted living facilities located in strong markets with high barriers to entry.

HCR ManorCare is owned by management and equity funds managed by the Carlyle Group.

Following the acquisition, HCR ManorCare and its affiliates will continue to operate the assets under a long-term triple-net master lease supported by a guaranty from HCR ManorCare. In addition, HCR ManorCare will grant HCP an option to acquire a 9.9% interest in HCR ManorCare for an additional purchase price of $95 million.

The triple-net lease with HCR ManorCare will provide for rent in the first year of $472.5 million, an amount representing 1.5x EBITDAR coverage ratio. The rent will increase by 3.5% per year after each of the first five years and by 3% for the remaining portion of the fixed term.

Completion of the transaction is subjection to regulatory approvals and third-parties consents, as well as other customary closing conditions. It is expected to close late in the third quarter.

HCP is a Long Beach, Calif., real estate investment trust primarily involved in health care properties.

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