Quality Care Properties (NYSE: QCP) has begun legal proceedings to have an independent receiver take over the operations of its skilled nursing and assisted living/memory care communities that currently are being operated by HCR ManorCare.
Toledo, Ohio-based ManorCare operates more than 500 skilled nursing facilities (SNFs), assisted living communities, outpatient rehab clinics, memory care communities, and hospice and home health agencies. After being beset by problems for several years, the company earlier in 2017 defaulted on its lease agreements with Bethesda, Maryland-based real estate investment trust (REIT) QCP, which is the landlord for more than 200 ManorCare properties.
Under the lease, ManorCare agreed that QCP would have the right to appoint an independent receiver to operate the facilities in the event of a default, the REIT stated in a press release on Friday. Now, QCP has filed a complaint in California State Court to take this course of action.
“HCR ManorCare has refused QCP’s requests to appoint fully independent directors and officers to oversee the skilled nursing and assisted living/memory care businesses at facilities owned by QCP,” the REIT stated. “Instead, the facilities remain under the control of the incumbent HCR ManorCare senior executive team and board of directors, who QCP believes are burdened by irreconcilable potential or actual conflicts of interest, including duties to sister companies in the HCR ManorCare group, personal claims against the HCR ManorCare group and potential personal exposure to HCR ManorCare and/or its stakeholders.”
All the ManorCare facilities in question are open, and QCP expects that patient care will not be interrupted by this process and that jobs will be preserved at these sites.
A court-appointed receiver would operate the ManorCare facilities in the QCP portfolio until the properties could be transitioned to new owners and/or operators. Moving forward, the REIT plans to execute a “regionalization strategy” to “offer new investment and new opportunities to local managers,” according to the press release.
A ManorCare spokesperson declined to offer comment on the matter, but Skilled Nursing News obtained the full text of an internal memo to employees, in which the provider blasted QCP’s move and vowed to fight the move toward receivership.
“This action is an insult to our frontline caregivers and the corporate staff who provide support to their coworkers in the field,” the memo reads.
ManorCare criticized QCP for “erroneously” determining that a third-party receiver would be in a better position to assess its operations than the provider’s existing management team.
“QCP has no credible party or plan for taking on HCR ManorCare’s industry-leading role,” the company said in the memo.
The message concluded with a reassurance that ManorCare’s operations will remain unaffected throughout the process.
“These actions by QCP will not result in any disruption to our day-to-day operations or our relationships with patients, families, employees, vendors, referral sources, and customers,” ManorCare said in the e-mail. “We intend to contest this legal action vigorously, set the record straight, and make every effort to protect our patients and employees from QCP’s reckless and self-serving actions.”
QCP’s stock ended Friday’s trading down $0.88 or 5.9%, closing at $14.14 per share.
Latest steps in an extended dance
Last year, QCP was formed as a spin-off from Irvine, California-based REIT HCP Inc. (NYSE: HCP). Since that time—under the leadership CEO Mark Ordan, a noted turnaround specialist—QCP has taken steps to stabilize the troubled ManorCare portfolio, weighing several options, including taking over full equity ownership of the properties.
But the new partners have faced a string of challenges since then. In April, QCP and ManorCare entered into a forbearance agreement in order to help the provider make rent, with QCP deferring $7.5 million per month between April and June as long as ManorCare covered the remaining $32 million per month in cash. That plan hit a snag in June, when ManorCare only came up with $15 million of its rent bill, citing pressure from its other secured lenders and lackluster profit projections.
The drama worsened from there. QCP made overtures to lenders about potentially buying out ManorCare through an equity takeover. The New York Post reported that ManorCare CEO Paul Ormond was demanding the immediate payout of a $100 million deferred settlement package. The Carlyle Group, the private equity firm that has owned ManorCare since 2007, had apparently washed its hands and given its blessing to QCP, with the Post reporting that Carlyle’s management was actively “ceding control” to the REIT.
No such deal ever materialized, however, and ManorCare missed its July rent payment entirely. QCP declared that its tenant was in default, and thus required to pay back the $79.6 million in back rent plus an additional $265 million in deferred rent obligations. Later that month, the provider confirmed that it had received a $550 million loan from another private equity firm, but declined to specify whether it would use the cash infusion to pay off its debts to QCP.
All of that backstory led to Friday’s receivership announcement, which an expert had predicted as a likely outcome in a late July interview with Skilled Nursing News.
David Gordon, a partner at the multinational law firm Dentons, said that either receivership or bankruptcy could help QCP take over ManorCare gradually, under the auspices of a court and legal experts.
“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.”
A representative from the Carlyle Group did not respond to a request for comment as of press time.
Court date set
In an unrelated action, the Justice Department received a court date for a lawsuit against ManorCare over allegedly fraudulent Medicare filings. The trial will begin on January 22 of next year, according to Jeffrey J. Downey, an attorney for complainant Christine Ribik, a former ManorCare occupational therapist.
Back in 2015, the Justice Department sued ManorCare under the False Claims Act, claiming that the provider had billed Medicare for “medically unnecessary” services.