Experts: ManorCare in for soft landing after bankruptcy

March 17--As far as bankruptcies go, experts say HCR ManorCare's recent Chapter 11 filing provides for about as soft a landing as possible.

Save two top executives who are being replaced, no one at the company's Toledo headquarters or any of its long-term care or skilled-nursing facilities across the country is expected to lose their jobs in the restructuring.

All of HCR ManorCare's creditors and vendors will be paid as they would have been had the company not found itself in federal bankruptcy court with a prepackaged, point-by-point plan to sell itself to Quality Care Properties, the real estate investment trust that owns nearly all the facilities ManorCare operates.

"A prepackaged bankruptcy is simply an organized bankruptcy, one where they sit back and say 'what's logically going to happen in this case, and let's just do that.' It's in bankruptcy for a very short period of time, and it's an efficient way to achieve what you need to achieve in the case," said Nancy Terrill, a business turnaround expert at Inglewood Associates in suburban Cleveland.

In HCR ManorCare's case, what it needed to achieve was getting out from under what had become an unmanageable lease agreement with Maryland-based Quality Care Properties.

ManorCare, which has about 1,700 employees locally and more than 50,000 nationally, has been struggling to keep up with its rent for the last two years, even as QCP agreed to reductions and deferments. Bankruptcy filings show ManorCare currently owes about $445 million in rent to QCP.

That debt would be wiped away in return for QCP taking over the company.

What happens once the bankruptcy deal is complete is more difficult to prognosticate. For QCP, this transaction is something akin to a fish swallowing a whale. In the company's most recent financial filing, it notes it has just 10 employees. And though the company has owned the real estate of skilled-nursing centers, its small executive team has no experience managing them.

"To be honest, I don't think they know what they're going to do," said Steve Monroe, a partner at the Connecticut health-care research firm Irving Levin Associates Inc. "They haven't had real access yet to the financial aspects of [ManorCare]. First they have to get in there and find out what the company looks like. They've got their work cut out for them."

Quality Care Properties has not responded to The Blade's requests for comment.

ManorCare says it operates about 500 assisted living, skilled nursing, and home-health and hospice centers under the ManorCare, Arden Court, and Heartland brand names.

Ahead of the bankruptcy filing QCP's chief executive officer Mark Ordan said his company would be working closely with ManorCare's senior management and operating teams to ensure a smooth transaction.

"HCR ManorCare's team of skilled, dedicated, and compassionate employees will continue to be the ultimate driver of the company's superior patient care," Mr. Ordan said in a statement. "We look forward to completing this transaction and to delivering long-term value to employees, patients, residents, and shareholders."

Mr. Ordan also announced at the time the company was bringing in a pair of executives with extensive experience in the skilled-nursing sector. They would serve as consultants for QCP working closely with ManorCare's team through the transition and ultimately take up senior executive roles at the restricted firm.

Guy Sansone, who is managing director and chairman of the Healthcare Industry Group at global professional services firm Alvarez & Marsal, is to become HCR ManorCare's chief executive officer. Laura Linynsky, QCP's senior vice president, will become ManorCare's interim chief financial officer.

Experts say those appointments appear to be solid moves and that for the time being, very little is likely to change for Toledo.

"The two people they brought in as far as I can tell have pretty solid backgrounds, so that's good," said Thomas Ealey, a professor of business administration at Alma College in Michigan. "It's an HCR operation with a new owner. Because of technical and regulatory and all sorts of other things, you still need that home-office staff. In the short run there should be some stability for both employees and patients and residents."

Quality Care's plans?

But Mr. Ealey, who has studied the skilled-nursing industry for decades, and other experts say in the long run it's possible QCP will look to sell off some -- or all -- of the ManorCare business.

Already, QCP has said 74 noncore skilled-nursing or senior-housing facilities are being put up for sale with the proceeds going to pay off debt. That would leave ManorCare with an expected portfolio of 160 skilled-nursing facilities and 58 assisted-living facilities located in 18 states.

If QCP continues to operate ManorCare as one company at that level or close to it -- or finds a buyer to unload the whole operation -- experts say the chances are good that things continue in Toledo much as they had been.

"If they nibble around the edges, then there's a need for Toledo. If it's broken up regionally and sold off then that's not really good for Toledo," Mr. Ealey said.

Industry observers say a number of compounding challenges have led to this point for ManorCare.

When the company was purchased by private equity firm The Carlyle Group in 2007, it was loaded up with debt ahead of the financial crisis, said J.B. Silvers, a health finance professor at Case Western Reserve University's Weatherhead School of Management. A few years later, Carlyle sold off ManorCare's real estate holdings to the predecessor firm of Quality Care Properties -- leading to lease obligations that were a large percentage of ManorCare's assets.

"That's the root of this thing," Mr. Silvers said. "They stuck themselves so far on a financial limb that they really didn't have any wiggle room."

ManorCare has also been hit by lower revenues from changes in the way federal government reimburses rehab facilities and nursing homes, as well as the impact of new accountability models that attempt to share costs and reduce rehab patients' lengths of stay in skilled nursing settings.

That has led to a notable decrease in revenues. Because ManorCare has been a private company, full financials aren't publicly available. But based on figures included in financial filings from QCP, ManorCare's revenues have slipped from $4.1 billion in 2015 to $3.7 billion last year. The company hasn't been profitable since at least 2014, with pretax losses last year totaling $268 million.

ManorCare officials were not available to speak with The Blade for this story, though earlier in March a company spokesman issued a statement that seemed to suggest the company would be profitable were it not for the rent obligations.

"HCR ManorCare believes this agreement should ensure the necessary financial stability going forward to protect our employees, patients, and partners and keep our three profitable lines of business viable going forward," the company said.

Finanical filings show ManorCare had paid $442.1 million in rent for 2016, and $482.6 million in rent for 2015 -- significantly more than its operational losses those years.

"They basically have lowered the debt level from the sky-high level where it was to something probably more reasonable," Mr. Silver said. "They won't have that financial load on them, and as long as they can make it on operating, they could well be OK."

There's hope

Even so, there's no question skilled nursing businesses have been struggling. A number of ManorCare's competitors have either been through restructuring or been pushed close to it. And, at least for now, the regulatory reimbursement environment isn't changing.

Still, the hope seems to be that with ManorCare's well-regarded operations it can succeed under a different capital structure and cleaner balance sheet.

A judge still must approve the bankruptcy deal, though experts don't see many challenges to that happening.

"If you wanted to cut a deal so the landlord basically got the business, it makes sense to go then to all the other unsecured creditors and say 'we're going to make you whole,'" Ms. Terrill said. "If that's what they're offering, who's not going to agree to that? Avoiding litigation and making it smooth and fast is to everyone's benefit."

Quality Care Properties has said it expects the bankruptcy court to approve the deal in this year's second quarter, with the final transaction expected to be completed in the year's third quarter.

Contact Tyrel Linkhorn at [email protected], 419-724-6134, or on Twitter @TyrelLinkhorn.

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