HCP (NYSE:HCP) announced that it has purchased a $720 million participation in first mortgage debt of HCR ManorCare at a discount for approximately $590 million. The $720 million participation represents 45% of the $1.6 billion most senior tranche of HCR ManorCare’s mortgage debt which bears interest at LIBOR plus 1.25%. HCP obtained favorable financing to fund 72% of the purchase price, resulting in a net cash payment by HCP of $165 million. HCP expects that the participation will have an effective unlevered internal rate of return of approximately 13%.
HCR ManorCare incurred $3 billion in mortgage debt as part of the financing for The Carlyle Group’s $6.3 billion acquisition of Manor Care, Inc. in December 2007. The mortgage debt matures in January 2012, with a one-year extension available at the borrower’s option subject to certain conditions, and is secured by a first lien on 331 facilities located in 30 states. The $1.6 billion most senior tranche had a debt service coverage ratio of 21 times for the most recently reported quarter and 10 times on a trailing twelve month basis ending that same quarter. HCP previously invested in mezzanine loans of HCR ManorCare having an aggregate face amount of $1.0 billion.
“HCR ManorCare is the premier provider of post-acute care services in the country, and the performance of its portfolio has exceeded our expectations,” said Jay Flaherty, HCP’s Chairman and Chief Executive Officer. “We are excited about our opportunity to accretively invest in this senior debt tranche and enhance the tactical options of our strategic investment in HCR ManorCare. We look forward to expanding our partnership with Chief Executive Officer Paul Ormond, his strong management team and The Carlyle Group.”