QCP Moves to Put HCR ManorCare Portfolio in Receivership

Quality Care Properties (NYSE: QCP) — the real estate investment trust that spun off from HCP Inc. (NYSE: HCP) last year — has started the legal process for transferring its many HCR ManorCare skilled nursing, assisted living, and memory care properties into the control of an independent receiver.

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  QCP, which is the landlord for nearly 300 ManorCare properties. As of June 30, 2017, QCP’s ManorCare portfolio consisted of about 230 post-acute/skilled nursing assets and roughly 60 assisted living/memory care 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 issued late Thursday. Now, QCP has filed a complaint in California State Court to take this course of action.

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“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.

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Representatives from ManorCare and Carlyle Group, its private equity owner, did not respond to inquiries from Senior Housing News for statements as of press time.

QCP’s stock ended Friday’s trading down $0.88 or 5.9%, closing at $14.14 per share.

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Last year, QCP was formed as a spin-off from Irvine, California-based REIT HCP Inc. (NYSE: HCP). Since that time—under the leadership of CEO Mark Ordan, a noted turnaround specialist—QCP has weighed several options for stabilizing the ManorCare portfolio, including taking over full equity ownership of the properties.

But the new partners have faced a string of challenges. 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 Senior Housing News’ sister site 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.”

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.

Written by Tim Mullaney, Elizabeth Jakaitis, and Alex Spanko

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