Tuesday, February 9, 2016

HCP Writes Down Equity for Carlyle Group's ManorCare

Six years ago Dealbook reported:

The Carlyle Group solidified its standing as one of the year’s busiest deal makers this week with an agreement late Monday to sell the real estate of its big nursing home operator, HCR ManorCare, to the real estate investment firm HCP for about $6.1 billion.

Under the terms of the deal, Carlyle will sell HCR ManorCare’s real estate to HCP for $3.5 billion in cash and HCP stock worth $847 million at Tuesday’s closing share price. Another $1.72 billion will come from the reinvestment of HCP’s existing debt investments in HCR.

HCR, which will lease back the 338 properties while still operating them, will wipe out nearly all of its debt. It will still be controlled by Carlyle, though HCP will gain the right to buy a 9.9 stake in the nursing home operator for $95 million.
HCP's stock imploded today, mostly due to its deal with Carlyle's ManorCare.  MotleyFool reported:

HCP warned that HCR ManorCare continued to face challenges, which it expects will continue into 2016. The REIT noted that "reduced growth outlook for the broader post-acute/SNF industry indicates challenges to the improvement in HCRMC's financial performance over the next few years."

Its recently filed annual report discloses that the company generated 23% of its revenue from HCR ManorCare in 2015.

The company took an $817 million impairment charge in the fourth quarter, reflecting its expectations for weaker performance. In addition to industry-related challenges, HCR ManorCare is currently under investigation by the Department of Justice, a quagmire that's costing the company $1 million per month in defense costs.

HCR ManorCare has been a problem for HCP in the past, with the REIT having once already cut the rent it charges to the company.
Caution when striking a deal with a PEU.  Like a viper they can turn on you.

As for Carlyle being a great operator one need only look at LifeCare Hospitals and ManorCare.  Carlyle destroyed LifeCare's equity to the point of bankruptcy and ManorCare might be defunct without the REIT deal which nearly eliminated HCR Manorcare's debt in 2010.

ManorCare could be at risk if Carlyle bled the company via dividend recaps.  That information won't be known until ManorCare goes public or bankrupt.  We'll see which comes first.

Recall this is the model proposed to save healthcare.  Surely it will put an end to us all.