Tuesday, Jun 19, 2018
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Dispute with landlord puts HCR ManorCare's future in question

Neither are behind the wheel of a speeding car, but both HCR ManorCare, Inc., the Toledo-based operator of 292 eldercare facilities, and Quality Care Properties, Inc., which owns those facilities, have been playing a “game of chicken” for the past 10 months.

Whichever swerves first could well determine whether ManorCare, which has 1,700 workers in the Toledo area, has a secure future or one that is in jeopardy.

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HCR ManorCare maintains 292 elder healthcare facilities and has 1,700 employees in the Toledo area.

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Quality Care’s lease allows it to place ManorCare in a court-approved receivership should the tenant default on its rent. And last May, ManorCare defaulted on its $39.5 million monthly payment.

On Aug. 17, Quality Care, of Bethesda, Md., requested a California Superior Court judge in Los Angeles appoint a receiver to take control of ManorCare.

However, during an extended four-month wait for ManorCare to respond to the request, the two sides agreed in December to a lower monthly rent of $23.5 million.

Even as a settlement appeared likely, ManorCare failed to pay the new rent by a Jan. 25 deadline. Then it asked the court to dismiss some of the receivership claims.

Quality Care, a public company whose stock is traded under the ticker symbol QCP, resumed its posture of seeking a receiver to take charge of ManorCare, which operates 292 post-acute/skilled nursing and memory care/assisted living properties owned by the real estate investment trust.

Experts say the ongoing dispute is raising many questions: Is Quality Care serious about receivership? Can ManorCare survive that? What would receivership look like? Does Quality Care want cash or perhaps something else?

“I don’t think QCP has any capability to operate nursing homes. The problem with nursing homes is you can’t take a week off to think about them,” said Thomas Ealey, a health care industry expert and a professor of business administration at Alma College in Michigan.

“It seems to me they are trying to force HCR to go out and find a buyer for itself or force them to go through a bankruptcy — which is something you can’t do with over 250 nursing facilities,” he said.

“The buyer would be the best solution for QCP,” Mr. Ealey added.

Stephen Monroe, a health care industry consultant and partner at Connecticut health-care research firm Irving Levin Associates Inc., agreed that finding a buyer for ManorCare’s operating licenses may be Quality Care’s goal.

“Their investors don’t want QCP to be a [real estate investment trust] with just one main tenant,” Mr. Monroe said.

“Under those circumstances, QCP makes less money and does not pay a dividend,” he said. “The shareholders would like to see ManorCare’s assets be dispersed to about 10 to 12 operators.

“That to me is the optimal outcome,” Mr. Monroe said.

ManorCare officials declined to comment on the situation. Quality Care officials did not respond to a request seeking comment.

Steve Skutch, a long-time receiver who has worked with many court systems, said taking control of ManorCare, with hundreds of properties subject to various state laws and responsible for the health of thousands of patients, would be a very complex and difficult task for any receiver.

The judge would decide if the receiver takes complete control of an entity or just certain aspect, like finances. “In this case I don’t know a receiver who would want to have complete responsibility for operating all these facilities,” Mr. Skutch said.

A receiver in charge of finances is the most likely scenario, he said. “In a lot of receiverships, they are run similar to a bankruptcy because you have certain priorities that must be met. Wages are the first wall and is typically a priority,” Mr. Skutch said.

“But in a case like this, what happens if nursing home ‘X’ can’t stand on its own feet? Would the receiver then shut it down and sell [the license]? How is that going to be looked at — as an individual property or part of a total package?” Mr. Skutch asked.

Mr. Skutch said Quality Care might question the financial priorities. “Is there a management fee being paid to HCR that they think isn’t a priority or necessary?” he said.

A receiver could question whether ManorCare has managed the 292 facilities correctly and decide a different eldercare operator should run the facilities, Mr. Skutch said. “If that were the case, and there was no income coming into HCR, it could very well force HCR into bankruptcy,” he added.

Mr. Ealey said in the background of the dispute is how ManorCare’s revenue stream has fallen the past two years. It no longer gets the lucrative Medicare reimbursements it did when it signed the lease in 2011. Financial filings show HCR ManorCare lost $3.7 million the past three years, including $3.2 million in 2016.

But Mr. Ealey said Quality Care has already cut ManorCare’s rent payments once, and its shareholders would not be pleased with further cuts.

Still, a receivership is not the way to go, he said. 

“It would be like the dog that finally caught the car, then didn’t know what to do with it,” Mr. Ealey said.

Any reconciliation would require both sides to sit down, take their medicine, and get back to business,” he said. “If I was QCP, I would hope ManorCare would come up with a deal to sell their (licenses). But I don’t know if there’s a deal out there for them,” he said.

Mr. Monroe said that Quality Care understands ManorCare’s reimbursements aren’t what they were, but that doesn’t matter.

“ManorCare has a contract to pay a certain amount of rent. The fact that life has changed for them, a landlord would say, ‘That’s not my problem,’ ” Mr. Monroe said.

He said it is logical to think that Quality Care has sent feelers to at least 15 regional-based eldercare operators about running the facilities if things with ManorCare don’t work out. “If they haven’t, I would be shocked,” he added.

“There’s some math involved. QCP is saying the road’s already been paved. Why lower the rent again?” he said.

Mr. Ealey said while the two sides play their “game of chicken,” and hope the other will blink, it’s important to remember that ManorCare doesn’t run a factory.

“These are elderly people in their facilities,” he said. “If you don’t run things correctly, people die.”

Contact Blade Business Writer Jon Chavez at jchavez@theblade.com or 419-724-6128.

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