HCP Renegotiates Leases for 333 HCR ManorCare Properties

HCP, Inc. (NYSE: HCP) and HCR ManorCare today announced an agreement to amend a master lease encompassing a portfolio of 333 properties ranging from post-acute, skilled nursing and assisted living facilities owned by HCP. 

Beginning April 1, the real estate investment trust (REIT) will provide an annual rent reduction of $68 million to the Toledo, Ohio-based HCR ManorCare, which will equate to initial lease year rent of $473 million, compared to $541 million that would have begun on that date prior to the lease amendment.

The lease amendment addresses concerns regarding low coverage ratios on the HCR ManorCare leases, said HCP President and CEO Lauralee Martin.

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“This amendment not only results in improved lease coverage, but positions HCR for growth by ensuring that adequate capital is available to advance their strategic business initiatives including continued investment in our real estate portfolio,” Martin said in a written statement.

In exchange, HCP will acquire 100% fee ownership in nine post-acute care facilities owned and operated by HCR ManorCare valued at $275 million. These properties have a median age of four years—three of which are in stabilization—and have a quality mix, skilled mix and operating margins “meaningfully above portfolio average,” HCP said in a company presentation on the deal.

Ownership transfer to HCP is expected to be completed within the next 12 months, subject to customary licensing and regulatory approvals. However, beginning April 1, HCP will begin to receive the allocated annual rent of the nine facilities, totaling $19 million. 

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In the event the REIT does not transfer ownership of these properties, HCP said it will retain a lease receivable of equal value, earning an equivalent initial cash lease yield of 6.9%, increased annually by 3% under the amended master lease. Also as a result of the transaction, HCP will receive a second lease receivable with an initial value of $250 million, payable by HCR ManorCare.

During its most recent earnings call, HCP indicated several issues related to HCR ManorCare, including how shifts in Medicare reimbursements have impacted the skilled provider’s bottom line. In the same call, the company also said that HCR ManorCare agreed to market for sale 50 of its non-strategic facilities.

The companies continue to advance their efforts on the marketing of these communities, the asset sales of which are expected to be completed in late 2015 to early 2016, generating net proceeds between $250 million and $350 million. Based on the previously announced 7.75% yield on sale proceeds to HCP, this will result in an annual rent reduction under the amended master lease between $19 million and $27 million after completion.

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Combined, the lease amendment and asset sale transactions will reduce HCP’s tenant concentration in HCR ManorCare from 29% to 25%.

“This pivotal transaction will immediately improve our financial flexibility and allow us to continue to grow the HCR ManorCare franchise,” said Paul Ormond, chairman, president and CEO of HCR ManorCare, in a written statement. “HCP is an experienced capital partner that understands the challenges faced by our industry in the current environment.”

Written by Jason Oliva

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