HCP plans to sell up to 50 HCR ManorCare SNFs, but will it really work?
The REIT HCP announced in February that it will try to sell up to 50 of its HCR ManorCare skilled nursing facilities to try to improve on the property level lease coverage ratio that is below 1.0x. The way it is going to work is that HCP will credit the annual lease payments in an amount equal to 7.75% of the sales proceeds. Using an example of a current 0.80x lease coverage on a facility to be sold, if it sold at a market cap rate of 12% to 12.5%, there would be no improvement in lease coverage. In fact, the coverage would decline slightly, so HCP would really not be any better off. One equity analyst did the math and figured that the only way it could help the lease coverage would be for the facilities to sell at a cap rate below 7.75%. Given these would not be the best assets in the portfolio, this would seem to be highly unlikely. Even with a portfolio premium, that cap rate would maybe be in the 8% to 10% range, at best, unless there was real room for improvement. But if that’s the case, HCP should be all over management to improve operations. That’s the best way to fix the problem.
