Quality Care Properties (NYSE: QCP) is poised to take ownership of HCR ManorCare’s hospice and home health business as part of a deal announced late last week.
The transaction follows a long period of financial troubles at HCR ManorCare and months of negotiations with QCP, a real estate investment trust (REIT) that is the landlord for more than 250 ManorCare properties.
Toledo, Ohio-based HCR ManorCare is one of the largest operators of skilled nursing facilities in the nation, and its Heartland Hospice and Home Health Care business is also sizable. Heartland was the third-largest hospice and 31st-largest home health company in the United States in 2017, according to rankings compiled by LexisNexis. Currently, the home health and hospice business has more than 100 offices in 23 states. They accounted for about 15% of the $4.1 billion in total revenues brought in by ManorCare in 2015, according to information released by QCP when it became a REIT in 2016.
Between 2012 and 2015, the operating margin of the Heartland home health and hospice business had grown by 3.7%, on an annual compound basis, the QCP document stated.
A disclosure statement filed with the bankruptcy court on March 4 confirmed this trend toward profitability on the home health and hospice side over the last several years and also included financial projections going forward. Home health, hospice, and other ancillary revenue is anticipated to increase from about $768 million this year to about $878 million in 2021.
At the same time that the Heartland businesses have been doing well, HCR ManorCare’s skilled nursing and long-term care business have suffered due to a slew of challenges, the document states. These have included increased competition from home health, reimbursement pressures from the growth of Medicare Advantage and managed care models, and a Department of Justice investigation related to false claims allegations.
In fact, since 2011, the Heartland businesses and some other segments have transferred more than $500 million in intercompany funds to help ManorCare meet its rent obligations to QCP, according to the court papers.
Under the terms of the deal now reached with QCP, ManorCare is expected to enter Chapter 11 bankruptcy protection. That would pave the way for QCP to take over the company through a prepackaged plan of reorganization, pending bankruptcy court and regulatory approvals. The plan is for QCP to shed its REIT status, allowing it to take full equity ownership of the ManorCare operating entity, currently owned by private equity firm The Carlyle Group.
The court’s approval is expected in the second quarter of 2018, with the transaction anticipated to be completed in the third quarter, according to QCP.
Patient care will not be affected by this deal, under which ManorCare’s employees, creditors, vendors and suppliers — aside from QCP — are not expected to be negatively impacted and will be paid “in the ordinary course,” QCP’s March 2 press release stated.
“This agreement facilitates a consensual resolution that provides stability and flexibility for the business,” QCP CEO Mark Ordan stated in the release. “We see this as the best available opportunity to improve a challenging situation. We considered every possible option and determined that entering this agreement to take direct ownership of our tenant best positions QCP to reposition the business to realize the potential of its properties for QCP shareholders.”
Effective immediately, Guy Sansone, managing director and chairman of the Healthcare Industry Group at global professional services firm Alvarez & Marsal, and Laura Linynsky, QCP’s senior vice president and a former COO of senior housing giant Sunrise Senior Living, will begin working in a consultant role to oversee the transition of ownership. Upon completion of the transaction, Sansone is expected to serve as ManorCare’s CEO and Linynsky is expected to become interim CFO.
“We have worked with QCP to reach an agreement that provides stability for our employees, residents and patients,” ManorCare president and CEO Steven Cavanaugh stated. “I am proud of the hard work and dedication that HCR ManorCare employees have continued to demonstrate in delivering outstanding care during difficult times.”
Other SNF companies are facing similar headwinds, leading some to conjecture that ManorCare competitors will also go through bankruptcies or restructuring.
Latest step in the dance
Friday morning’s news marks the latest milestone in a troubled tango between the two partners. ManorCare accounted for 94% of QCP’s revenues during the 12 months ended December 2016. This became a problem last year, when the beleaguered ManorCare fell behind on its rent payments and eventually defaulted on its lease, facing $265 million in deferred rent bills.
QCP attempted to appoint a third-party receiver to oversee ManorCare’s operations, a move that the provider resisted — while the REIT itself ended up offering multiple extensions of its receivership deadline to the provider.
QCP’s stock spiked in the wake of the news, ending regular trading on Friday up 20.05%, at $16.26.