Analysis of HCP's spinoff of 320 senior housing assets.

1. Analysis and Recommendation
By Daniel Timianko
HCR ManorCare SpinCo
Investment Memorandum
5/16/16 1
Disclosure: This report contains speculative data and forward looking statements. Due to the impending spinoff, some
details may be inaccurate and/or changed upon the completion of an initial public offering.

2. Analysis and Recommendation
By Daniel Timianko
EXECUTIVE SUMMARY
THE PURPOSE OF THIS INVESTMENT MEMORANDUM IS TO
ANALYZE AND OFFER STRATEGIC ADVISORY ON THE PROPOSED
SPINOFF OF HCP’S HCR MANORCARE PORTFOLIO OF SKILLED
NURSING, POST-ACUTE CARE FACILITIES AND SENIOR HOUSING.
OVERVIEW
On May 9th 2016 HCP announced a plan to spinoff their skilled nursing
facilities (SNF), post-acute care facilities (ACF), and select senior housing
facilities. The new company, initially organized as a REIT, would own
approximately 320 properties with about $485,000,000 of net operating
income. Most, if not all, of the spun off assets will be managed by HCR
ManorCare.
HCP is a healthcare real estate investment trust. It invests in medical office
buildings, hospitals, senior housing, life science facilities, and hospitals.
HCP holds $23.5bn in real estate investments as of Q4 2015. HCP also
participates in debt investments as a senior mortgage lender and as a
junior lender.
BUSINESS
HCP’s investment strategy is to raise mostly unsecured debt (92% of Total
Debt) to develop and manage properties serving the health care industry
nationwide and in the United Kingdom. The growth strategy of HCP lies in
internal growth and accretive investments. Constant dividend growth
makes HCP a very attractive investment in a low interest rate environment.
The dividend can be grown through increasing portfolio NOI internally or
acquiring more property to increase total cash flow. In the first quarter of
2016, HCP has spent $335m on developing new property or redeveloping
current holdings. None of their CAPEX has been allocated to SNF.
Additionally, HCP has acquired $364m of SNF, senior housing, life science,
and medical office property this quarter. Maintaining dividend growth will
be a challenge if 23% of portfolio NOI will be spun off. However, the
combined dividends may continue to grow for yield hungry investors.
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HCR ManorCare SpinCo
FINANCIAL HIGHLIGHTS
HCP has grown to a $26.70 billion market capitalization real estate
investment trust. HCP holds a BBB- credit rating, but is in danger of being
further downgraded due to the leverage needed for the spinoff. Total
debt is 41% of overall capital, leaving equity to be 59% of capital. The
HCR ManorCare (HCRMC) portfolio has been challenging for HCP. Over
the past 12 months, HCP renegotiated the master lease with HCRMC
and impaired $836m of value. The spinoff is clearly a defensive tactic by
HCP to insulate itself from further risk from one of its largest operators.

3. Analysis and Recommendation
By Daniel Timianko
STOCK INFORMATION
HCP has not been performing very successfully when
benchmarked against the NAREIT Equity REIT Index. It
has underperformed the NAREIT Equity REIT Total
Return Index over the past two years. Beta investors,
which are a majority of REIT common stock investors
would have achieved higher returns by investing their
capital in index funds instead of in HCP directly.
HIGHLIGHTS
HCP exhibited greater volatility than the NAREIT
Equity REIT Index in part because of the $836m
impairment on HCP’s holdings related to HCR
Manorcare in 2015. The 2H of 2015 was surprising for
HCP investors because of a reported loss in FFO and
-7% same store growth in HCP’s SNF segment.
Being an S&P 500 Dividend Aristocrat implies dividend
strength for HCP. Unfortunately their annual dividend
growth rate has slowed. After posting 5%, 3.8%, and
3.7% dividend growth in 2013, 2014, and 2015
respectively, 2016’s dividend has grown only 1.8%. It is
of the highest priority to maintain consistent dividend
growth for HCP. Their HCR ManorCare holdings are
inhibiting growth.
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HCR ManorCare SpinCo

4. Analysis and Recommendation
By Daniel Timianko
HISTORY OF HCP AND HCR MANORCARE
HCP began its relationship with The Carlyle
Group’s HCR ManorCare through purchasing
a subordinate loan from the buyout in 2007
with a face value of $1.0 billion.
In August 2009, HCP purchased $720 million
of HCRMC senior debt secured by its
property portfolio.
In December 2010, Carlyle sold 338 SNF,
assisted living, and post-acute care facilities
for $6.1bn to HCP. This sale included a right to
purchase a 9.9% interest in the operating
company for $95 million, which HCP
exercised.
– HCP provided:
• $3.528bn in cash
• $1.72bn in reinvested debt held
by HCP
• $852 million in HCP common
stock
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HCR ManorCare SpinCo
Upon sale of the portfolio, HCP and HCRMC
negotiated a triple net master lease:
• Annual rent increases of 3.5% for 5 years, 3%
thereafter.
• There is one extension option after 13-17
years depending on pool.
• Rent increases are fair market value or 3%
annual ranging from 10-18 additional years.
On April 1st, 2015 HCP and HCRMC renegotiated
their master lease:
• HCP reduced annual rent by $68 million to
$473 million with contractual increasing 3%
annually.
• HCRMC transfers fee ownership in 9 new
post-acute facilities to HCP. If properties
cannot be transferred, HCP will retain a
lease receivable of equal value.
• HCP receives a lease receivable of $250
million in the event of capital or liquidity
events or end of the initial master lease
term. The receivable increases 3% annually
from 2016-2018, 4% in 2019, 5% in 2020, and
6% from 2021 thereafter.

5. Analysis and Recommendation
By Daniel Timianko
OTHER NOTES REGARDING THE HCRMC PORTFOLIO
• In December 2015, HCP reduced the carrying value of its 9.9% equity interest
in HCRMC’s operating business to $0.
• As part of the Master Lease restructuring in Q1 2015, HCRMC has agreed to
sell 50 non-strategic facilities. As of Q1 2016, 33 facilities have been sold.
• HCRMC has agreed to sell 9 SNF facilities to HCP for $275m, 7 have closed.
• HCP has increased its lease receivable by $275m in the form of a deferred
rent obligation in exchange for a reduction in current rent.
• HCRMC leases are structured as capital leases. The leases can stipulate a
bargain purchase option, long term lease for 75% of economic life of
property, or ownership transfer to lessee at end of lease.
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HCR ManorCare SpinCo

6. Analysis and Recommendation
By Daniel Timianko
5/16/16 6
76%
24%
Portfolio Mix
CON States
NO CON
States
0
10
20
30
40
50
60
SNF
0
2
4
6
8
10
12
Senior Housing
HCR ManorCare SpinCo

7. Analysis and Recommendation
By Daniel Timianko
HCR ManorCare SpinCo
5/16/16 7
PORTFOLIO COMMENTARY
Location Analysis: As illustrated on the previous page, the HCRMC portfolio is
separated into two property types. Ohio and Pennsylvania are the two largest
markets followed by Florida in senior housing and Michigan for SNF. Very few of
the properties are located in high barrier major with above average price
appreciation. Chicago, Philadelphia, and Detroit are the top 3 MSAs.
Certificate of Need: A certificate of need is a state law that requires new
construction of healthcare facilities to only be built when need is determined.
The highly regulated nature of these types of facilities allows the established
operators to have a higher barrier of entry for newly built facilities. These laws are
intended to limit healthcare price inflation. This should help with portfolio
occupancy.
Leasing: Of the 320 properties being transferred into a separate company, all of
them are master-leased by HCR ManorCare. This pools all of the properties into
one lease. All of the leases are NNN, meaning the landlord is responsible for little
or no property level expenses, insurance, or taxes.
Quality: Further research must be done on a property-by-property basis to
evaluate the condition of the properties and compare them to replacement
cost. The average age of post-acute facilities in HCP’s portfolio is 34 years old.
Remember that the useful life of commercial property according to the IRS is 39
years.
Vacancy: Even though the properties are master-leased by HCR ManorCare,
vacancy should be measured by the tenant’s performance. HCRMC’s portfolio
wide occupancy is 83.9%. Look nearby for the proper metrics in measuring
portfolio performance. HCR’s senior housing properties underperform.
Fixed Charge Coverage Ratio: As you can see to the right, the EBITDAR fixed
charge coverage ratio for HCR is near 1X. This means that HCRMC is in danger of
not paying their rent and interest expense this quarter. HCP has renegotiated its
master lease to reduce HCRMC’s rental obligations. Continued poor
performance by HCRMC will lead to further impairment.
Leasing Metrics (12 Months Trailing)
EBITDAR: $503.2m
EBITDARM: $517.4m
EBITDAR FIXED CHARGE COVERAGE RATIO:
1.03X
EBITDARM FCCR: 1.06X
Senior Housing
1Q Cash NOI: $16.8m
Investment:$1.17bn
Quarterly Yield: 1.4%
Vacancy: 16.1%
Portfolio Vacancy (Excluding HCR): 12.5%
SNF/Acute Care
1Q Cash NOI: $96.1m
Investment: $3.94bn
Quarterly Yield: 2.5%
Vacancy: 16.4%
SNF Portfolio Vacancy (Excluding HCR): 15.8%

8. Analysis and Recommendation
By Daniel Timianko
SELECTED FINANCIAL HIGHLIGHTS
FROM HCR MANORCARE’S
OPERATIONS ($ in thousands)
Q1 2016:
Portfolio NOI: $112,988
Occupancy: 83.6%
Total Units: 36,966
NOI Growth: (13%)
Q1 2015:
Portfolio NOI: $130,709
Occupancy: 83.6%
Total Units: 36,966
NOI Growth: 3%
Q1 2014:
Portfolio NOI:$126,539
Occupancy: 84.3%
Total Units: 39,724
NOI Growth: (14%)
Q1 2013:
Portfolio NOI:$144,350
Occupancy: 85.5%
Total Units: 41,384
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HCR ManorCare SpinCo

9. Analysis and Recommendation
By Daniel Timianko
CONCLUSIONS FROM FINANCIAL AND PORTFOLIO ANALYSIS
HCP’s investment in HCRMC is very difficult to value considering that HCP holds an
equity interest in the operating company while also being a liability on HCRMC’s
balance sheet. Separating HCP from its holdings in HCRMC better positions HCP to
focus on its private pay portfolio and to maintain its identity as a real estate company.
The newly spun off company is technically a hybrid between a real estate company
and an operating company. Maximizing the value of its real estate holdings will
minimize the value of its operating business. However, adding value to the operating
business will increase the value of HCRMC’s real estate. Establishing an identity for the
SpinCo is the number one priority.
One metric to be explored is the value of the 9.9% equity interest in HCRMC’s operating
business. While it was purchased for $95m originally, the value today will help us decide
strategic options. HCP has impaired the value of the equity interest in HCRMC to $0.
Additionally, HCP impaired $1.3bn related to HCRMC leases. HCRMC assets are valued
at $5.1bn currently.
Over the next few pages I will analyze the strengths and weaknesses of the proposed
SpinCo and then propose some opportunities to create value as well as describe
threats facing the new company.
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HCR ManorCare SpinCo

10. Analysis and Recommendation
By Daniel Timianko
5/16/16 10
HCR ManorCare SpinCo
SWOT ANALYSIS
STRENGTHS
• HCRMC has a national platform in many high barrier to entry health care markets.
• HCP trades at a premium to net asset value, making the timing for a spinoff ripe.
• New SpinCo has a $525m corporate lease receivable in the event of a capital or liquid event.
The receivable increases annually.
• There is precedence for a skilled nursing/post-acute facility spinoff from Ventas. The new REIT is
called Care Capital Properties.
• There are strong demographics for senior housing and health care facilities. Baby boomer
retirement will increase demand for properties being spun off.
• Since HCP uses unsecured debt, the properties being spun off are mostly unencumbered.
• The single master lease has cross-default protections.
WEAKNESSES
• There are multiple lawsuits pending against HCRMC for improper billing practices.
• Due to the passage of the Affordable Care Act, many of the patients in the skilled nursing
facilities have migrated to managed care health plans that reimburse less. It is having a
significant impact on HCRMC’s revenues.
• Care Capital Properties has lost significant equity value since its IPO. There will be low investor
appetite for a SNF REIT.
• HCRMC is struggling to pay its fixed charges.
• The spinoff is viewed by the public as “cut and run” by HCP.

11. Analysis and Recommendation
By Daniel Timianko
OPPORTUNITIES
Opportunity 1: Stabilize and Consolidate
The SNF REIT subsector is dominated by Omega Healthcare. There are few other significantly sized pure play
SNF REITs. Such a highly dispersed field presents an opportunity for consolidation among some of the smaller
REITs. The long term goal of SpinCo can be to grow to the largest SNF pure play REIT by combining with a
number of the small/mid cap SNF REITs like CCP or CTRE. This opportunity can precede or succeed
stabilization for the SpinCo. If SpinCo can raise capital at a favorable cost, it can diversify through a merger
or an acquisition. To receive the best valuation for SpinCo, fixing the current holdings would be preferable.
Opportunity 2: Taking an Active Role in Operations
The operating entity of HCRMC has seen little success. Revenue has fallen, lawsuits have been filed, leases
have been restructured, and confidence is gone. With a 9.9% ownership in the operating entity, SpinCo can
assist in the turnaround process. Besides lowering fixed charges, SpinCo can help HCRMC diversify from the
reimbursement/managed care sources of revenue to private pay sources. It can introduce cost cutting
measures and cull the leases that are not profitable. Since HCRMC is a private company, their financials are
not open to the public. Perhaps SpinCo can take a role in restructuring any existing debt that will help
HCRMC succeed operationally.
Opportunity 2A: Transforming HCRMC
In addition to the suggestions in Opportunity 2, SpinCo can enter a joint venture with HCRMC to transform the
facilities into higher-end private pay facilities. Many of the risks inherent in managed care will be mitigated or
supplemented by private pay facilities in the same location. This opportunity is extremely risky and requires a
lot of capital and patience for results. If SpinCo’s management believes strongly that the status quo will lead
to bankruptcy, then this Opportunity may be most logical.
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HCR ManorCare SpinCo

12. Analysis and Recommendation
By Daniel Timianko
Opportunity 3: Takeover of HCRMC
If SpinCo feels their 9.9% interest in HCRMC will become a liability with current management, then the next
round of rent concession negotiations can include a controlling interest in the HCRMC operating entity. This
control will allow SpinCo to pursue all strategic options including: a sale, default on leases to vacate
properties, cost cutting measures, or merging with another operator. A highest and best use analysis should
be explored to search for any hidden value in the properties.
Opportunity 4: Passive Stability
This strategy recommends further rent concessions and allowing HCRMC the flexibility to fix their business.
Taking a passive strategy on the portfolio will be supplemented by an active strategy in making accretive
investments in SNF or senior housing properties. The strategy is to diversify away from the HCRMC portfolio. This
strategy might cause a conflict of interest with HCP because it will still maintain an interest in SNF. SpinCo and
HCP might compete for the same private pay properties for acquisition.
THREATS
• Continued contraction in revenue for HCRMC.
• Inability to raise funds on a favorable cost of capital basis for new REIT.
• HCRMC bankruptcy.
• Increased regulation in the SNF/ACF sector that will decrease profit margins and health ratios.
• Lawsuits damage HCRMC’s brand.
• Larger macro-economic events that will decrease spending on health care and GDP.
• Lack of diversity in the portfolio.
• Pure Play REITs fall out of favor for more diversified and better capitalized REITs.
• Changes in patient management make SNF and ACF fall out of favor. Changing the use may be
difficult.
• Long lease maturities.
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HCR ManorCare SpinCo

13. Analysis and Recommendation
By Daniel Timianko
HCR ManorCare SpinCo
Recommended Capital Offerings
EQUITY
The market value of equity has yet to be priced. Pricing it
can be reached through comparable analysis in price-to-
AFFO or NAV. The most simple comparison is CCP. CCP
trades at an 8X multiple. Omega trades at a 10X multiple
(projected). HCP currently trades at a 13X multiple. NAV is
more of an art and can be assessed post spin when all parts
of the capital stack are raised.
DEBT
SpinCo must raise debt in order to control the costs of
capital. Unsecured corporate debt may be cheaper, but it
leaves all corporate assets liable in the event of default.
However, the initial spin will almost exclusively hold properties
under a master lease. So the performance of all properties
are connected regardless. Exploring a portfolio-wide debt
offering privately may also raise the capital needed.
Establishing a credit facility for quick access to capital is
important. Also accessing the senior bond market will
control the cost of capital.
PREFERRED
Offering preferred stock may increase investor appetite for
SpinCo because of its fixed dividends and low volatility.
However, any new equity offering might undervalue SpinCo
significantly.
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60%
30%
10%
0%
Proposed Capital Structure
Common
Stock
Mortgage
Debt
Credit
Facility
Unsecured
Debt

14. Analysis and Recommendation
By Daniel Timianko
RATIO ANALYSIS
When pursuing an initial public offering,
management needs to be cognizant of how the
rating agencies will issue a credit rating based on
certain metrics. The image to the right is a sample of
ratio performance for each credit rating.
Most REITs aim for an investment grade credit rating
of BBB, very few REITs have an A rating. With easy to
understand cash flows from the spun off properties,
maintaining an investment grade rating depends on
raising a conservative amount of debt and growing
revenues. The challenge for SpinCo will be to
maintain the level of revenue from the HCRMC
master lease.
The debt capital raised upon becoming public must
provide ample returns because the inherited
portfolio requires defensive management. The
picture to the right should set the goals of
performance.
5/16/16 14
HCR ManorCare SpinCo

15. Analysis and Recommendation
By Daniel Timianko
SECTOR OUTLOOK
As a company having a stake in a healthcare operating company and as a healthcare property owner, keeping up with trends in
this space is essential. The healthcare economy receives much attention in the media and in government. It is a closely monitored
sector because of its cost, ethics, and impact on American families.
TRENDS IN SNF/ACF
-The Centers for Medicare and Medicaid have increased reimbursements by 2.1% in 2017.
-The Affordable Care Act has migrated millions of patients to lower reimbursement managed care plans.
-Patients are becoming more dependent on the ADL scale, requiring more attention from nurses.
-Long-term care facilities are not covered by Medicare or many private insurers. SNF are an attractive option to control costs.
WHAT IS THE COMPETITION SAYING?
We remain as bullish as ever on the skilled nursing space. As has been the case for the last 15 years, the skilled operators, who are
nimble, talented, sophisticated and committed to quality care, will be able to capitalize on the increasing demand for
transparency, quality, data and collaboration with the acute hospitals, managed care organizations, home health providers and
other stakeholders in their local markets. – David Sedgwick, VP of Operations of CareTrust REIT on Q1 2016 Earnings Call.
All of the change in healthcare (are) designed to do two things, improve quality and reduce cost. It is an undisputable fact that
there is no lower cost facility based setting than skilled nursing in which to provide high levels of care. A hospital stay can cost
anywhere from $2,000 to $4,000 per day versus $500 per days in the skilled nursing facilities. The potential savings in the skilled nursing
facility are dramatic and compelling compared with any other portion of the healthcare continue and with advances in technology
and care our nursing homes are increasingly able to provide high quality care for more complex post-acute conditions. All of this
supports that the demand for skilled nursing services will only continue to increase. So I think there is a lot of good news about the
future of the skilled nursing industry which is not getting much (of) your time. -Raymond Lewis, CEO of Care Capital Properties on Q1
2016 Earnings Call
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HCR ManorCare SpinCo

16. Analysis and Recommendation
By Daniel Timianko
Concluding Thoughts
With a fully impaired operating business and a below basis property portfolio, the new SpinCo has many
challenges ahead. Value can be created in the property portfolio as a result of repairing HCRMC’s operating
business. The role in which to play should be decided on a thorough understanding of the potential value of
HCRMC. HCP has attempted to insulate itself from the issues at HCRMC, but the SpinCo may not have that
luxury. With an entire portfolio so intimately connected to one tenant, the fate of the operating business has
an outsized impact on the new REIT.
The strategies presented, besides Opportunity 3, will be successful if HCRMC returns to profitability. Further
analysis of HCRMC is needed to decide whether its poor performance is due to current management or
sector risk. From my reading, it seems that there is a place for skilled nursing facilities in the healthcare
landscape. In the case of poor management, SpinCo has a strategy to take an active role in the operating
business. If the whole sector is falling out of favor, SpinCo will have to transform the use of the portfolio or
consolidate with a peer because the basis of the investment in SNF and ACF is extremely overvalued today.
All in all, SpinCo must take a position on its confidence in the current management of HCRMC and the long-
term value of SNF/ACF. SpinCo can then act accordingly to create shareholder value.
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HCR ManorCare SpinCo