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LONG BEACH, CA-The health care properties REIT HCP has acquired a $720-million stake 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 mortgage debt owed by Toledo, OH-based HCR ManorCare, which operates skilled nursing and rehabilitation centers.

The debt that HCP bought bears interest at Libor plus 1.25%. 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.

HCP says that it 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%.

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 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 12-month basis ending that same quarter. HCP previously invested in mezzanine loans of HCR ManorCare having an aggregate face amount of $1 billion.

Chairman and CEO Jay Flaherty of HCP, which recently reported results for the second quarter ended June 30, described HCR ManorCare as “the premier provider of post-acute care services in the country” in a statement regarding the debt purchase. Flaherty said that the performance of ManorCare’s portfolio “has exceeded our expectations.”

In its quarterly financial report, HCP said that its FFO rose to $146.1 million and 55 centers per diluted share in the quarter, up from $119.1 million and 50 cents per share in the comparable quarter last year. Net income dropped to $91.8 million and 35 cents per diluted share, compared to $225.9 million and 96 cents per share in the year-ago period. Net income for this year’s second quarter included gains of $30.5 million on sales of real estate, compared to gains of $190.5 million on sales in the year-ago period.

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