When Quality Care Properties, Inc. (NYSE: QCP) announced an agreement to take over its troubled tenant HCR ManorCare late last week, it capped a long struggle between the landlord and the skilled nursing provider.
The Bethesda, Md.-based QCP is expected to lose its status as a real estate investment trust (REIT) as a result of the deal, while ManorCare will enter bankruptcy protection.
Whether that’s good or bad depends on your point of view — and it could be a sign of more bad news in the skilled nursing industry.
“I think big-picture, the story here is not so much QCP and HCR ManorCare,” David Gordon, a bankruptcy lawyer and partner at multinational law firm Dentons, told Skilled Nursing News. “I believe we’re heading into a big period of distress in senior housing and skilled nursing in particular, and these types of things are going to be happening with increasing frequency.”
Last Resort?
QCP had made multiple attempts to resolve the situation with Toledo, Ohio-based ManorCare, he noted. Those overtures included a receivership claim, which ManorCare sought to have dismissed.
“The fact that they were willing to give up that REIT status and acquire their operator suggests to me that the situation with ManorCare was really bad, and this is what they had to do to get themselves out of it,” Gordon said.
ManorCare is expected to file for Chapter 11 bankruptcy protection in the coming days, allowing QCP to take over via a prepackaged plan of reorganization. The deal is subject to regulatory and bankruptcy court approvals; the court’s okay is expected in the second quarter of 2018, while the transaction is projected to be completed during the third quarter.
Using the prepackaged plan of reorganization minimizes the cost and the risk of losing control, Gordon explained. But that strategy comes with some risks of its own.
“The downside with the bankruptcy is you kind of risk losing control of the situation,” he said. “You can lose control along the way, because once you’re in bankruptcy, there’s the bankruptcy court, there’s the creditors, there’s other interested parties — and they all get a say in what happens.”
Benefits of Control
But by taking over, QCP does gain control of decision-making over ManorCare.
That’s a substantial benefit, according to Tim Cobb, investment sales lead of senior housing and health care at broker Berkadia.
“Typically when you see these things happen, it’s not because they’re trying to avoid a negative situtation. It’s more that they see an opportunity to restructure by gaining control of those properties,” he said.
QCP losing its status as a REIT “could look problematic,” at least from a tax benefits standpoint, according to Cobb. REITs have a lower tax burden than other businesses, but the benefits of gaining control of ManorCare — and the resulting flexibility in its capital structure from that control — seem to outweigh the tax benefits of REIT status, Cobb explained.
“It’s the right move, it’s a good move,” he said of the takeover.
The recent tax overhaul is also a factor. ManorCare, which accounted for 94% of QCP’s revenue in the 12 months ending in December 2016, wasn’t paying its rent, and without income, tax status becomes less of a consideration, Cobb noted.
“I would say that with the drop in corporate tax rates, with the change in corporate income tax from 35% to 21%, it seems that now would be the time to make this move,” he said.
E-mails to QCP and ManorCare’s private-equity owners, The Carlyle Group, were unreturned as of press time.
Uncertain Future
The difficulties of the skilled nursing environment are well-known: low occupancy, heavy regulation, sagging reimbursements, thin margins.
So it’s possible that even though the situation with ManorCare was unique, particularly in terms of how much exposure QCP had to the skilled nursing provider, the move could be the opening salvo in a string of other overhauls. In one example, Signature HealthCARE, based in Louisville, Ky., is hoping to reach a deal to restructure its financial obligations.
“There is a possibility that there will have to be other restructurings considering not only the pressure in the skilled nursing industry, but the length of this pressure,” Bill Kauffman, senior principal at the National Investment Center for Seniors Housing & Care (NIC) told SNN. “So the possibility is there for additional restructuring as it is happening now. There are discussions of more restructuring, especially when it comes to the lease payments to REITs.”
Written by Maggie Flynn
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