HCR Manorcare

3/4/18 Recap: Ohio-based Carlyle-backed long-term care provider of 450 (i) skilled nursing and impatient rehab facilities, memory care facilities and assisted living facilities (the "Long-Term Care Business"), (ii) hospice and home health care agencies, and (iii) outpatient rehab clinics filed a prepackaged bankruptcy after months of back-and-forth with its REIT-parent and Master Lease counterparty, Quality Care Properties Inc. ($QCP). The bankruptcy will effectuate a transaction pursuant to which QCP will shed its REIT status and take on 100% of the stock in the reorganized HCR. 

Interestingly, retailers aren't the only businesses capitulating under the weight of their rent. Here, the revenues generated by the Long-Term Care Business weren't generating sufficient revenues to cover ordinary course operating expenses and monthly rent obligations to QCP. By way of illustration, 

"For the twelve months ended December 31, 2017, the Company had revenues of approximately $3.741 billion, 82% of which derived from the Long-Term Care Business, and reported a consolidated pre-tax loss from continuing operations of approximately $267.9 million. As of December 31, 2017, the Company had approximately $4.264 billion in total assets and approximately $7.118 billion in total liabilities, debt and financing obligations...."

Rough. In 2016, HCR paid approximately $442mm ($37mm a month) in minimum rent to QCP. In 2017, after extensive negotiations, the amount dipped to $290mm ($24mm a month). With amounts that staggering, no wonder the company struggled. 

The relationship between QCP and HCR emanates out of a 2011 sale-leaseback transaction. After said transaction, QCP became an independent publicly traded company. Significantly,

"At the time of the 2011 Transaction, the business environment in the post-acute/skilled nursing sector was favorable due to a number of factors, including an aging population, expected increases in aggregate skilled nursing expenditures, and supply constraints in the skilled nursing sector due to substantial barriers to entry. The parties negotiated the amount of rent payable under the MLSA against this background."

But, as we consistently point out here at PETITION, projections don't always pan out as planned. Indeed, after the consummation of the 2011 transaction, 

"...the operating environment for post-acute/skilled nursing facility operators has become significantly more challenging. Unfavorable trends for operators of skilled nursing facilities include (a) a shift away from a traditional fee-for-service model toward new managed-care models, which base reimbursement on patient outcome measures; (b) increased penetration of Medicare Advantage plans, which has reduced reimbursement rates, average length of stay and average daily census; (c) increased competition from alternative healthcare services such as home health agencies, life care at home, community-based service programs, senior housing, retirement communities and convalescent centers; and (d) reductions in reimbursement rates from government payors."

Obviously this is a bit of a problem when your have a month rent nut of $37mm. 

• Jurisdiction: D. of Delaware (Judge Gross)
• Capital Structure: $400mm '18 9.5% TL debt (RD Credit LLC), $150mm '19 9.5% RCF, $445mm guaranty obligations under the Master Lease.
• Company Professionals:
  • Legal: Sidley & Austin LLP (Larry Nyhan, Dennis M. Twomey, William A. Evanoff, Allison Ross Stromberg, Matthew E. Linder) & (local) Young Conaway Stargatt & Taylor LLP (Robert S. Brady, Edmon L. Morton, Justin H. Rucki, Ian J. Bambrick, Tara Pakrouh)
  • Financial Advisor/CRO: AlixPartners LLC (John Castellano)
  • Investment Banker: Moelis & Co.
  • Independent Directors: Sherman Edmiston, Kevin Collins
  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name above for free docket access)
• Other Parties in Interest: TBD. 

Updated 3/5/18