Recently filed bankruptcy documents reveal that HCR ManorCare’s total missed rent to Quality Care Properties, Inc. (NYSE: QCP) topped $445 million — while its former CEO is set for a handsome payday.
Paul Ormond, who left the embattled provider in September, could receive a settlement in excess of $100 million, according to a letter from ManorCare to Ormond that the provider included in a filing with the Securities and Exchange Commission.
Those were just some of the revelations buried in ManorCare’s bankruptcy plan, which the company and its landlord released over the weekend and Monday. As a result of ManorCare entering Chapter 11 bankruptcy protection, the Bethesda, Md.-based QCP will take ownership of the provider, stripping QCP of its status as a real estate investment trust (REIT). In all, ManorCare finds itself $7.1 billion in debt, according to a report from Reuters.
Taken together, the documents paint a picture of a troubled skilled nursing operator kept afloat in part by its far more lucrative home health business — with the first warning signs emerging relatively early on in the QCP-ManorCare relationship.
Troubled from the start
The union between the two companies began back in April 2011, when the Toledo, Ohio-based ManorCare entered into a sale-leaseback transaction with HCP, Inc. (NYSE: HCP).
As soon as June 2012, ManorCare’s rent coverage ratio dipped below the agreed-upon threshold, according to the filing, resulting in a “rent coverage trigger event.” The provider’s skilled nursing operating subsidiary also struggled to maintain cash flow sufficient to pay the leases, prompting management to pull funds away from the home health segment.
Between 2011 and April 2017, home health and other ancillary services — referred to as the “4H business” in the bankruptcy filings — transferred $500 million to the skilled nursing operation in order to help it make rent.
“Unlike the long-term care business, the 4H business and outpatient rehab and other businesses have continued to grow and, in the case of the 4H business, has been increasingly profitable in recent years,” the bankruptcy disclosure statement notes.
In the midst of these challenges, HCP spun off its embattled ManorCare assets into QCP, a newly formed “pure play” skilled nursing REIT, in 2016.
The rest of the story played out in the pages of the trade publications and SEC filings, with QCP moving to place ManorCare in receivership after it defaulted on its lease, and ManorCare striking back in court. QCP also offered multiple extensions for the provider to respond to the receivership claim, during which time the parties hammered out the bankruptcy and takeover plan.
For Ormond, the results of those negotiations will be positive: The former CEO stands to receive approximately $60.8 million in frozen supplemental executive retirement plan (SERP) funds, $42.0 million from a senior management savings plan for corporate officers (SMSPCO), and about $9.9 million from a SERP replacement.
Go-forward plan
Under the restructuring deal, the rents for ManorCare’s skilled nursing facilities will be determined by its free cash flow through 2025; after payments and reserving for other liabilities, ManorCare will turn over all the cash generated by its 295 skilled nursing and assisted living facilities to satisfy its rent obligations.
“While the precise levels of free cash flow for these businesses can vary from month to month and year to year, the debtor is confident that free cash flow for the foreseeable future will be substantially positive on a monthly basis, and, accordingly [operating company} HCR III will be capable of timely satisfying all obligations as they come due through at least 2025,” the disclosure filing indicates.
Still, the plan warns that success in the skilled nursing industry isn’t guaranteed due to a variety of familiar factors: shifts away from fee-for-service Medicare, the rise of managed Medicare plans, competition from home health, and regulatory scrutiny.
“The company also competes with numerous other companies providing similar healthcare services or alternatives such as home health agencies, life care at home, community-based service programs, senior housing, retirement communities, and convalescent centers,” the filing notes. “…Further, many competing companies may have resources and attitudes that are superior to those of the debtor.”
QCP’s stock continued to climb in the wake of the restructuring news, closing Monday’s trading at $17.00 for a gain of $0.74 or 4.6%.
Written by Alex Spanko
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