Hcr Manorcare, Inc. – $7 Billion in Debt – Files for Chapter 11 Bankruptcy

Files For Chapter 11 Bankruptcy - Hcr Manorcare, Inc. - $7 Billion In DebtHCR Manorcare, Inc., the second largest nursing home operator in the United States, has filed a voluntary petition for Chapter 11 Bankruptcy. The Toledo, Ohio-based company has $7 billion in debt..

Informed sources say the Chapter 11 petition is part of a pre-arranged debt-for-equity swap deal whereby ownership of the HCR will be transferred to its landlord, Quality Care Properties, Inc. (“QCP”).

According to the QCP website, the company is “…a self-managed and self-administered real estate investment trust (REIT)… focused on post-acute/skilled nursing and memory care/assisted living properties.” QCP claims to be “…one of the nation’s largest actively-managed real estate companies.”QCP is located in twenty-seven states. Its holdings include 257 post-acute/skilled nursing properties, 61 memory care/assisted living properties, a surgical hospital, and a medical office building.

HCR Manorcare (“HCR”) is a privately-owned company in the state of Delaware where the Chapter 11 filing took place earlier this week. Majority ownership of HCR was acquired by The Carlyle Group in 2007.

The Carlyle Group is a multinational private equity, alternative asset management, and financial services corporation founded in Washington, DC in 1987. Carlyle is the world’s largest private equity firm according to a ranking known as the PEI 300 (the ranking was based on capital raised in the preceding five years).

The business structure of The Carlyle Group is composed of four major segments:

  • Corporate Private Equity: Carlyle division that is focused on investing primarily in leveraged buyouts and growth capital transactions via a range of geographically focused investment funds; division advises twenty-three “buyout” and ten growth capital funds, with $73 billion Assets Under Management (“AUM”) (*);
  • Real Assets: Carlyle division that advises eleven U.S. and Internationally-focused real estate funds, two infrastructure funds, two power funds, an international energy fund, and four Legacy Energy funds, with $43 billion in AUM (*);
  • Global Credit: Carlyle division that advises fifty-eight funds that seek out investment opportunities across distressed and special situations, direct lending, energy credit, loans and structured credit, and opportunistic credit, with approximately $33 billion in AUM (*);
  • Investment Solutions: Carlyle division that includes Alpinvest Partners (global private equity) and Metropolitan (real estate) “fund of funds” programs and related co-investment / secondary undertakings through fund vehicles, with approximately $46 billion in AUM (*)

(*) All noted Assets Under Management (AUM) figures (approximately $195 billion) are quoted as of December 31, 2017

The Carlyle Group has been highly successful and profitable in its thirty-one-year history, but not without controversy. The following two examples highlight some of the controversy.

The company is a major focus in the 2004 documentary Fahrenheit 911 by filmmaker Michael Moore. The film takes a highly critical look at the presidency of George W. Bush, the so-called “War on Terror”, and coverage of both in the U.S. “corporate media”. In the documentary, Michael Moore looked into the company’s close and controversial connections to former-President George H.W. Bush and his former-Secretary of State James Baker. Both the Senior Bush and Baker have served as advisers and equity holders in the Carlyle Group.

The second example is found in William Karel’s The World According to Bush. In that film, Karel interviewed former Reagan Secretary of Defense Frank Carlucci, III about the Carlyle Group’s annual investor conference that was taking place on September 11, 2001, while the 9/11 attacks were underway. The controversy that was discussed centered on the fact that a brother of Osama bin Laden, Shafiq bin Laden, attended and played a fairly significant role at the conference.

HCR’s history dates back to 1929, when two Illinois glass companies (Owens-Illinois, Inc. and Owens Bottle Company) merged to form the Owens-Illinois Glass Company (“O-I”). The former Owens Bottle Company was a manufacturer of glass products for the drug and medical fields.

In 1982, O-I was set on the path to nursing home/care facility ownership. First, it created a group that centered on pharmaceutical packaging that manufactured scientific glassware. That move was followed by a major investment in the Nashville, TN Health Group, Inc. (“HGI”) a hospital management group that owned specialty hospitals and nursing homes.

Between 1984 and 1995, HCR (still operating under the O-I umbrella) extended its reach into the nursing home sector, growing exponentially with investments and acquisitions as follows:

  • 1984 – O-I acquires Healthcare and Retirement Corporation of America (“HCRA”). HCRA owned forty-six facilities with 5,000 + beds at the time
  • 1985 – O-I acquires Health Group Care Centers, a division of HGI. Acquisition included twenty-six facilities in ten states
  • 1986 – O-I acquires Care Corporation of Grand Rapids, MI, adding forty-one nursing homes with 5,300 beds in six states
  • 1990 – O-I, having become a major skilled nursing provider with 135 nursing facilities with more than 17,500 beds, forms Ancillary Services, Inc. a supplier of MediCare Part B products and supplies
  • 1992 – Operating as HCR, the company formed Heartland Rehabilitation Services, and acquired Sylvania Therapy Services representing a major expansion into the rehabilitation services sector. The company further expanded outpatient rehabilitation services and operations into New Jersey, Florida, Kentucky, and Virginia
  • 1994 – Heartland Care Services and Omnicare, Inc. (a 50/50 partnership) is formed by HCR to supply and distribute pharmaceutical products.At the turn of the twenty-first century, HCR had grown to become the second largest nursing home operator in the United States, a place it still holds today as it moves into Chapter 11 bankruptcy.Between the mid-1990’s and 2008, HCR continued to grow by acquiring properties from other senior care enterprises. In 2008, HCR achieved $4 billion in annual revenues and the future looked bright.

Then – after the economic meltdown in 2008 – 2009 – the company found itself strapped for cash and struggling to manage its large, widespread portfolio of senior care properties. It began a nearly ten-year program of divestments that didn’t end until 2015.

In 2008, HCR divested three skilled nursing centers, two in California and one in Indiana. In 2009, the company divested two additional skilled nursing centers, one in Illinois, the other in Ohio. In 2010, with signs of some recovery in the economy, HCR opened two new facilities – ManorCare Health Services Wingfield Hills, Sparks, NV and ManorCare Health Services Washington Township, Sewell, NJ. At the end of 2010, HCR was working hard to balance its books; owning and managing such a large number of facilities was proving to be somewhat of a burden, both financially and logistically.

In March, 2011, HCR and a real estate investment trust headquartered in California, HCP, initiated a $6.1 billion sale/leaseback transaction. HCR sold 338 post-acute/skilled nursing and assisted living facilities to HCP under an agreement whereby HCR continued to operate and manage all of the sold assets. The years 2013 and 2014 saw divestments of skilled nursing centers in West Virginia and Illinois (a total of three divestments in those years).

Finally, in 2015, HCR completed its program of strategic divestments by divesting fifty skilled nursing, memory care, and assisted living facilities across eighteen states.

The recent Chapter 11 filing comes on the heels of a dispute between HCR and its landlord that has festered over the past year. The dispute centers on unpaid rents. In the bankruptcy petition, HCR ManorCare said that revenues have failed to cover monthly rent obligations since at least 2012, a year after the company’s master lease was filed. The lease covers 289 of HCR’s facilities in a number of states. The owed rent figures are nothing short of stunning – $446 million that accrue at the rate of $39.5 million per month.

The company blamed “shrinking margins” at its post-acute and skilled nursing facilities, citing a number of factors as the reason for such blame, including: reduced government reimbursement rates; low occupancy across all segments; a nationwide shift to new managed MediCare plans; and alternative services (such as home health care and burgeoning retirement communities).

Industry insiders privately say that “back rent and defaults are not the only problem… mismanagement, exorbitant salaries for some top executives, and other factors surely have led HCR ManorCare to the point where bankruptcy was its only alternative.” Sources within QCP (speaking on the condition of anonymity), revealed that their deal with HCR includes a settlement agreement with HCR’s former CEOPaul Ormond. Ormand was owed over $100 million when he left the company in September, 2017.

Under a restructuring agreement that was agreed upon by HCR and QCP in advance of the bankruptcy filing, The Carlyle Group will cede total ownership of HCR ManorCare to Quality Care Properties, Inc. A further stipulation of the agreement requires QCP to give up its status as a real estate investment trust. Such agreement is subject to approval by the bankruptcy court.

In 2017,HCR reported revenue of $3.7 billion, 82% of which reportedly came from its long-term care portfolio. It showed a pre-tax loss from its continuing operations of $268 million on assets worth $4.3 billion according to the company. HCR’s legal troubles caused the company to set aside $308 million to cover legal defense and potential settlement costs. HCR is facing hundreds of claims against its long-term care business. HCR has vigorously denied any liability arising from such claims.

Additionally, HCR is involved in four lawsuits brought by shareholders of its previous landlord, HCP, Inc. In 2016, HCP, Inc. spun off HCR’s real estate portfolio that it had purchased from Carlyle in 2011. The Carlyle Group gained a majority equity stake in HCR ManorCare in a leveraged buyout in 2007.

Quality Care ProductsQuality Care Products, Inc. is based in Bethesda, MD. As noted elsewhere in this article, QCP and HCR have been in a back-rent dispute for over a year. In December, 2017, QCP wrote on it’s company website that “…QCP and HCR (along with HCR III Healthcare, LLC, QCP’s principal tenant) agreed to further extend the deadline for HCR’s response to QCP’s receivership complaint against HCR…”.

In August, 2017, QCP filed a complaint in California state court seeking the appointment of an independent receiver for certain HCR facilities. On August 21, 2017, HCR said in a statement that it “…intends to vigorously contest QCP’s request for the appointment of a receiver to oversee HCR’s assisted living and skilled nursing facilities.” In a letter to employees on that date, HCR said “QCP has no credible party or plan for taking on HCR ManorCare’s industry-leading role.” QCP shot back at HCR’s contentions by telling the press that it’s receivership request was provided for in the master lease and other lease agreements. Lease provisions enable QCP to ask for a receivership in the event that HCR defaulted on its rent obligations. The fact of such default(s) is clear from all of the records that have been made public in the matter.

The underlying reason for the December extension was “…to allow for negotiations regarding a comprehensive restructuring of the economic relationships between the parties (i.e. HCR, HCR III, and QCP).”

As of March 2nd, the receivership request had not been finalized or granted. Recent moves by the two parties seem to have rendered as moot the question of a receivership. It is expected that once the Chapter 11 bankruptcy case is closed, QCP will approach the California court overseeing the case and request a dismissal of the petition.

The QCP website also noted at the time that “…HCR ManorCare continues to be in default under the Master Lease and Security Agreement dated as of April 7, 2011…” –and – “…the Company (QCP) received $19 million in rent from HCR… for November, 2017.”

The recent Chapter 11 bankruptcy filing by HRC may be an indication that the December, 2017, “negotiations regarding a comprehensive restructuring…” collapsed and came to naught. On the other hand, the filing may have come about by strategic agreement between HRC and QCP to move the matter into federal bankruptcy court as a means of finalizing an already settled agreement. Some media reports in recent days seem to point to the latter.

In a March 2, 2018, update released to the media QCP said:

“…HCR ManorCare and QCP have reached an agreement to transition

the ownership and leadership of HCR, including its skilled nursing, assisted

living, hospice, and homecare businesses to QCP. The transaction is

expected to recapitalize HCR and provide stability and flexibility to better

react to today’s rapidly changing post-acute care industry…”

The news release characterized the transaction as a “pre-packaged plan of reorganization”, thus indicating that HCR’s Chapter 11 petition was one that came as no surprise to QCP. Under the agreed upon plan, HCR subsidiaries will not be affected.

Once the Chapter 11 reorganization plan is formalized and sanctioned by the bankruptcy court, the restructured company will move forward as follows:

  • QCP’s claims (including deferred rent obligations and unpaid rents) to be exchanged and released for 100% equity ownership of HCR by QCP
  • HCR to become an indirect subsidiary of QCP
  • QCP no longer qualified for REIT status
  • HCR will continue to accrue and pay rents to QCP during the Chapter 11 proceedings
  • QCP will install a new CEO and other top-level executives

At the time the “pre-packaged agreement” was signed last week, HCR paid $23.5 million in rent to QCP. That sum represented $14 million that came due on January 25, 2018, and $9.5 million that was owing as of February 10, 2018. Given a total outstanding rent debt of nearly half billion dollars, such sums were mere “token payments” in acknowledgment of the long-range settlement of all issues. The agreement calls for HCR to continue to make rent payments during the Chapter 11 period.

A March 2, 2018, article posted on McKnight’s Senior Living website delved fairly deeply into QCP’s post-bankruptcy plans for the former HCR business and facilities.

Guy Sansome (see sidebar bio) will be named as Chief Executive Officer of HCR. Laura Linynsky, currently QCP’s senior vice president and former COO of Sunrise Senior Living, will serve as HCR’s interim Chief Financial Officer (CFO) once the reorganization plan is approved by the bankruptcy court.

QCP’s CEO, Mark Ordan, praised both Sansome and Linynsky as “competent and able managers”, and said, “Under Guy and Laura’s leadership, HCR will continue to support the excellent employees providing long-term care, hospice and rehabilitation services, and corporate services to enhance patient care and drive referrals.”

During the pendency of the Chapter 11 proceedings, both Sansome and Linynsky will serve as consultants to work with HCR senior managers to “…facilitate a smooth transition of leadership and ownership”.

QCP CEO Ordan continued, “In the coming weeks and months we will work closely with HCR senior management and the rest of HCR’s management and operating team in order to ensure a smooth transition…. We look forward to completing this transition and to delivering long-term value to employees, patients, residents and shareholders…”.

Statements of executives from both involved companies point to an amicable settlement of their differences via the pre-arranged reorganization plan process.

Adding to the optimistic statements and outlook of QCP’s Ordan, HCR’s CEO and President, Steven Cavanaugh weighed in: “We have worked with QCP to reach an agreement that provides stability for our employees, residents and patients. I am proud of the hard work dedication that HCR employees have continued to demonstrate in delivering outstanding care during difficult times. We will work tirelessly through the transition to ensure that the company continues to deliver the same level of outstanding care.”

Cavanaugh’s optimism was echoed by HCR’s Chief Restructuring Officer John Castellano who said in a March 4th statement “We have invested a significant amount to time and effort in developing this proposed solution for all constituents involved. We believe that this agreement is a positive outcome for all of HCR’s stakeholders…”.

Future Securities and Exchange Commission (SEC) filings will give greater detail regarding the Plan Sponsorship Agreement as well as the Chapter 11 Reorganization Plan. The controlling stockholders of HCR have added their imprimatur to a restructuring support agreement that signals their full acceptance of the restructuring and reorganization agreements.

News of the agreement between QCP and HCR has taken a load off the backs (and minds) of QCP investors. A report last week on the Yahoo finance website reported that a day after the announcement of the deal QCP stocks rose 27%. Investors appear to have let out a sigh of relief that the uncertainty that QCP had been facing for months, if not years, has been lifted. In the Yahoo story, the writer noted that QCP will no longer qualify as an REIT – to qualify as an REIT the primary business must be ownership of properties; with HCR becoming a wholly owned subsidiary of QCP, the primary business becomes the ownership and operation of skilled nursing facilities – and noted that QCP investors don’t seem to mind that change at all. He wrote, “The resolution of the ongoing drama with HCR is a huge weight off the shoulders of QCP and its investors, and now the company can move forward and focus on operating a profitable skilled nursing business.”

On February 7, 2018, QCP stocks closed at $12.79 per share. Today (March 7th), the close was higher at $17.18 per share. In just one month, QCP has posted a gain of 26% When the restructuring is finalized in the third quarter of this year such results portend that QCP will continue to prosper.

In many cases, the processes of a Chapter 11 bankruptcy are complicated, arduous, and lengthy. In a case such as the HCR ManorCare filing – where the parties have worked out a pre-arranged reorganization plan prior to filing a bankruptcy petition – the processes are simpler and the time frame from filing to close is truncated significantly. While the bankruptcy court will scrutinize the documents and agreements presented, it is highly likely that the court will sign off on everything in fairly short order (speculation is that all agreements will be finalized in the second quarter of the current year, with the bankruptcy matter being closed out early in the third quarter).

Photo credit: kalhh, qcpcorp