ManorCare Could Be Heading for a Breakup Amid Troubles

As HCR ManorCare, Inc.’s battle with landlord Quality Care Properties (NYSE: QCP) drags on, the most likely outcomes for the skilled nursing operator are bankruptcy or receivership, according to a bankruptcy lawyer with experience in health care industry restructuring.

QCP, a Bethesda, Md.-based real estate investment trust (REIT), was reportedly close to a full equity takeover of ManorCare in June, when the skilled nursing operator’s longtime private-equity owner, The Carlyle Group, indicated its intentions to cede control. ManorCare’s troubles have only continued since then, as the operator missed several deadlines and now finds itself in default and on the hook for $79.6 million in back rent and more than $265 million in deferred rent obligations.

However, a REIT landlord buying out its tenant could have unwanted repercussions, according to David Gordon, a partner at multinational law firm Dentons.

“Acquiring ManorCare would be a risky thing for QCP,” Gordon told Skilled Nursing News. “They don’t want to control and dominate their tenant, because if they do that, they run the risk of a landlord liability.”

Many vendors could go unpaid amid ManorCare’s troubles, and then look to QCP for reimbursement, Gordon said.

However, QCP cannot simply terminate its lease with the Toledo, Ohio-based ManorCare and enter into a lease with a new operator. There needs to be a lengthy transition period that involves the changeover of licensure and provider agreements, Gordon said.

“QCP is really in a tough situation here,” Gordon said. “They need to be a REIT, they need to be a landlord, they need to not control their tenant, but their tenant is not paying them rent. There’s not an easy way, given the state regulatory change of owner (CHOW) process and the federal process of transitioning to a new operator, to simply remove their operator and plug in a new one. They’re in a bind.”

Bankruptcy or a state law equivalent, such as receivership, are two plausible options for ManorCare, according to Gordon, and both would likely lead to the dissolution of the chain.

In a bankruptcy, it is unlikely that ManorCare would retain control over its facilities. For the chain to do so, it would have to resolve all existing defaults under its lease, including the payment of all back rent. Unless there is a large injection of money from an outside source, this appears unlikely, Gordon said, and if the company was unable to assume the lease, ManorCare would have to sell to another operator.

ManorCare did secure a $550 million loan from New York City-based private equity firm Centerbridge Partners, according to a report from the Toledo Blade on Friday. However, a ManorCare spokeswoman only said that the company would use the cash to repay a $375 million term loan, and that talks with QCP were ongoing.

Receivership would be a helpful mechanism for QCP to stabilize the situation and transition to a new operator in a controlled way that doesn’t disrupt patient care, according to Gordon.

“If QCP were to take over, they would want to do it as part of some court process,” Gordon said. “They would want to have a receiver appointed for ManorCare, or to have ManorCare transition through bankruptcy. Outside of some court process, a REIT landlord taking over its tenant seems to me to be incredibly risky.”

Written by Elizabeth Jakaitis

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